Not all ‘doom and gloom’ in the markets: Is the US dollar a safe bet in 2021?
The scourge of 2020 has followed the United States into the new year. The first week of 2021 saw the country dealing with a political coup as hundreds of protesters stormed Capitol Hill, resulting in injuries and deaths. Since the forex market is particularly sensitive to political turmoil in the US, it’s no surprise that the dollar has been affected by the drama at the White House.
Poor NFP results, stalled stimulus talks, a political coup… In this article, we focus on the US dollar and what its performance could mean for forex traders in the weeks ahead.
Poor NFP results yet dollar rises
One of the biggest indicators of the US economy is the Nonfarm Payrolls (NFP), and sadly the latest report doesn’t bode well; jobs in the US dropped 140 000 in December 2020. This result followed November’s increase of 336 000 jobs. The reason for the drop was due to a resurgent COVID19 virus ravaging the US in the final month of the year and stalled stimulus talks. Curiously, the country’s unemployment rate stayed unchanged at 6.7% and the Average Hourly Earnings rose by 0.8%.
Despite the NFP report souring the mood of investors, it’s important to note that this was the first drop reported since March 2020. The dollar however is rising alongside US treasury yields. The US job market performance is being offset by upward revisions and the aforementioned increase in wages.
“Blue Wave” to spark stimulus
As we’ve seen in 2020, the US is a country heavily affected by political turmoil. Despite a controversial election, the greenback has already seen a rise in response to the Democrats gaining control of the US Senate in 2021. President-elect Joe Biden is set to outline his economic plans later on Thursday, January 14 and this could include a generous stimulus to the country’s economy.
Control of the Senate will allow Biden to enact more of his ambitious fiscal agenda. Experts predict stimulus will come in two forms – personal stimulus cheques and budgetary reconciliation.
In December 2020, stimulus check were blocked by Republicans. With a Senate majority, the US Congress will likely pass stimulus checks totaling $1400 per person. Analysts believe this could lift the country’s GDP by 0.7% with an average end-of-year forecast of 4.3% in 2021. These measures will be a boon the ailing US economy and dollar desperately need.
Trump blocked, banned and could be impeached
Outgoing President Donald Trump is ensuring he doesn’t fade away into obscurity ahead of his exit from the White House. In fact, Trump could face a second impeachment after his supporters stormed the Capitol. Twitter and Facebook have permanently suspended his accounts following accusations that he incited supporters to violence.
Unlike the US, the political drama in Washington has had little effect on global markets which, bar the gold industry, has been booming since the start of the year.
Pandemic rages as vaccines to be rolled out
COVID-19 infections are on the rise in the US and Europe. Worse is the death rate which continues to spike in the US heading towards 380 000. Governments are under increasing pressure to escalate vaccine rollouts to curb the “second wave” of the virus. The US has been ravaged by the pandemic and all eyes will be on Biden to curb the menace. If infections continue to rise, this could be disastrous for a global economy struggling to recoup its 2020 losses. For the dollar, a resurgent coronavirus will likely cause an even bigger collapse.
The dollar could decline in 2021 as much as it did in 2020, but a large depreciation/crash does not appear likely. Many analysts compare the currency’s performance in 2020 and predict a poor 2021 outlook for the dollar. This is based on surging risk appetite, political uncertainty and/or a deficit crash.
The dollar may indeed decline again but an overly negative prediction isn’t warranted. There are many positives for the country, specifically related to economic stimulus and if the pandemic can finally be brought under control, we could see a major rally in 2021.
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