Let's recap the week's gentle rumblings on FX from policy makers. US Treasury Secretary nominee Janet Yellen said the US would adhere to market-based determinations of FX rates in her confirmation hearing Tuesday. Never mind that record-breaking QE is outright manipulation of the bond market and indirect FX intervention. On Thursday, ECB's Lagarde was silent on the euro's direction, while warning of double-dipe recession in the Eurozone. On Friday, USD reversed the week's course to rebound against all major currencies, save for EUR. So what do  we make of the inv H&S in DXY? Below is Friday's Premium video, highlighting the technical rationale for the latest trades on XAUUSD, EURUSD and EURNZD. 

All currencies ended the week higher against the US dollar, but on Friday, the greenback reversed corused and strengthened against all currencies (including gold and silver), with the exception for EUR. 

The ECB has been clear that it doesn't want a stronger euro, especially with the eurozone expected to recover slowly from the pandemic. This week's ECB decision will be all about the levers it can pull to keep the euro from appreciating further.

EUR/USD has risen to 1.21 from 1.06 at the pandemic low and it's near a two-year high. More worrisome for the ECB is that if it rises another 400 pips, it will be at the highest since 2014.

The US has the ability to easily monetize debt but with eurozone deficit rules, it's much tougher. That leaves policymakers in the bloc with few options in the face of FX strength.

China has shown it can be bullied by the US on the currency but with a less antagonistic President, they might attempt to weaken the yuan. We have already strarted to see USD/CNH pushing further, while DXY bounced off the neckline of its inv H&S seen in the above video. 

Other countries will also have to continue to navigate US currency policy. Switzerland was named a currency manipulator in the latest Treasury report and that gives the Biden administration some leverage as they enter office.

With the presidential inauguration out of the way, we keep an open mind as the policies of the new administration start to unfold-- Tax decisions, energy policy and foreign/econ policy vis-a-vis China. The past four years has certainly taught everyone to be ready for anything.

USD weakness extended anew as the ECB leaned towards guarded optimism in Thursday's meeting. ECB policy makers continue to be more pre-occupied with the deflationary obstacles to recovery. Earlier this week, policy makers at the BOE and BoC highlighted that the fate of accumulating personal savings were vital to the economic outlook once the pandemic has passed. On Wednesday, Ashraf posted the below chart to the WhatsApp Broadcast Group, highlighting a possible recurrence of the Dec 8 peak, which triggered a $50 drop pullback before later bouncing towads the 1950s. Stay alert. 

The combination of stay-at-home orders and government handouts has left many consumers with swollen balance sheets. In normal times, you would expect that to lead to a boom in consumer spending but central bankers are cautious about the timing and nature of that spend.

Surely there will be some celebrating when it's all over and travel will temporarily boom but it's not clear whether it will all be spent, or how quickly. It's possible the pandemic leaves consumers more cautious but it's equally plausible that they end up spending more than ever before.

Where exactly that level of spending falls was highlighted as the key post-pandemic x-factor by the BoE's Bailey and BoC's Macklem on Wednesday and the market will no-doubt be watching how that develops.

It's still far too early but in a few months, we will start to closely watch pent up spending and sentiment data in the UK and US. Another spot to watch closely will be Israel, which is on track to be the first country to fully vaccinate and re-open. How consumers behave there will be a strong clue on what's coming elsewhere.

Lagging behind in the recovery will be the eurozone, in part due to a slow vaccine rollout. The statement from the central bank was essentially unchanged and Lagarde repeatedly emphasized that QE would continue until at least March 2022. She also offered jawboning by saying the rising euro is a drag on inflation.

The press conference helped to stall the euro's rally but the scope for further cuts everywhere is fading so dovish talk will have a diminishing effect. The next big question will be who tapers first.

US dollar is well off its highs after Janet Yellen reiterated the importance of allowing market-determined exchange rates and sticking with the status quo order of FX dynamics.  The fact that she did not reiterate the long-touted "strong USD policy" expressed since the mid 1990s may allow for further decline in the greenback. Elsewhere, CAD dropped to start the week on a report saying Biden will halt the Keystone XL pipeline but more than actions themselves, the market will be looking at Biden priorities domestically and abroad early in his term. The chart below dissects EURUSD futures positioning into gross longs and shorts, highlighting the direction and similarity/dissimilarity between now and 2018. 

Biden had promised to halt the Keystone XL permit in his campaign so it doesn't come as a big surprise and shares of the pipeline operator itself only fell 4%. So it was an overreaction to see the loonie down 40 pips early in the week and it later halved the decline.

More than the loss of export capacity, we'd argue that signals from Biden are more meaningful. Trump deeply strained relations with many allies including Canada. Repairing those is assumed to be a Biden priority but such quick action against a key Canadian project suggests that might not be the case.

One thing to watch will be where Biden decides to visit first. In-person diplomacy is on hold because of the pandemic but there's a deep symbolic value in a Presidents first visit. For generations, Presidents visited Canada first but George W Bush broke that streak with a visit to Mexico. Trump's first stop was Saudi Arabia and that signaled a shift to a pro-Saudi, anti-Iran stance.

All of Mexico, Saudi Arabia and Iran will be waiting for early signals on what Biden's trade priorities will be.

Of course, the largest trading relationship in the world is the US and China and that's the critical question for global growth in his term. Politically, it would be impossible to undo all of Trump's moves but China will surely offer an olive branch. Ultimately, it will be the most-difficult dance of his Presidency and a tough one to predict.

It's a holiday in the US and metals are recovering after opening sharply lower in Asia on a broad USD rally, triggered by comments regarding Yellen's likely USD stance (see below). A 'sell the fact' mood hit markets last week after Biden's big stimulus and Friday's retail sales report was a reminder of how much heavy lifting governments are doing. The pound was the top performer last week while the kiwi lagged. CFTC positioning data shows that USD shorts aren't losing their nerve despite the recent bounce. We turn to Yellen's Senate Hearings tomorrow. Below is the net short-positioning of DXY. 

The US is on holiday Monday so that may slow the start to the trading week. The main event this week is Biden's inauguration but barring something unforeseen like the Capitol riot, it won't be a market mover.

The holiday gives us a chance to digest the huge stimulus proposal and the market's reaction. So for the political reaction has been relatively positive but with Trump's impeachment on the agenda, clear signals have yet to emerge.

What did emerge on Friday was a poor retail sales report, down 1.4% in December compared to a flat reading expected. Worse yet, the prior was revised lower to -1.4% from -1.1%. There was an even larger miss and negative revision in the key 'control group' measure.

Two soft months from the US consumer at the most-critical time of the year suggest that stimulus is a bigger part of the equation than many market participants would like to admit.  

Early in the week, we will continue to evaluate the mood in the market. Treasury yields have retraced but the dollar has remained strong but that may be due to soft softness in equities and US-China friction. This week should offer a clearer picture on the underlying trends.

Aside from comments from Biden, Treasury Secretary-nominee Yellen will appear in the Senate on Tuesday. She will testify that the US won't seek a weaker dollar, leaving it to the market.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR +156K vs +143K prior GBP +13K vs +4K prior JPY +50K vs +50K prior CHF +12K vs +9K prior CAD +12K vs +14K prior AUD +5K vs -4K prior NZD +15K vs +12K prior

US dollar shorts are edged higher this week with AUD flipping back to a net long, meaning futures speculators in every major currency are short the dollar.

Joe Biden unveiled a huge stimulus plan on Thursday and the next step will be to watch how lawmakers react to it. USD pushes back up as yields are immobile, while the reflation trade gets hit as Biden's $1.9 trillion plan is likely to be watered down by lawmakers. Below are some of the trades to fade yesterday's EURUSD bounce and re-enter XAUUSD shorts for our WhatsApp BroadCast Group members.  Ashraf warned members to continue fading any USD pullback ahead and from Yellen's testimony next week .

Details of the stimulus package rolled out Thursday and it will include $1400 cheques, $350B for state and local governments, $440B for businesses, larger unemployment benefits and more for vaccines and testing. The only thing the market might not like is $15/h minimum wage, but that was a key campaign promise.

The price tag is $1.9T and that's less than the 'trillions' promised by Biden last week but this is also just a first step with a larger long-term infrastructure and green plan to come.

The details of the plan are important but equally important will be how lawmakers in both parties react. This is a tough plan to vote down for politicians on both sides but won't underestimate the partisanship and hypocrisy in Washington.

If something that largely resembles this plan sails through Congress, it's a strong sign of Democratic unity and spending. That will push up yields and drag the dollar with it, at least initially. If it's immediately bogged down in infighting, then it will dampen the US recovery.