The dollar index hedged lower during early Friday trading, after hitting a two-month high on Thursday. Despite this morning’s losses, resulting from a feeble increase in risk appetite that followed reports that a $2.2 trillion fiscal package could be voted next week in the US Congress, the greenback’s short-term performance is likely to remain to the upside.
With an economic recovery unfolding at a slower pace than forecast, political partisanship in Washington holding back the release of a much needed fiscal stimulus package and yesterday’s refusal by President Trump, to commit to a peaceful transfer of power, the uncertainty is likely to, in the short-term, reinforce the safe-haven appeal of the dollar.
Volatility continues to increase in stock markets as the week draws to an end, especially in Europe, where most benchmarks opened mixed but with strong price actions. Rising virus infections are weighing on market sentiment, principally after France and the UK registered new record numbers. Investor hopes are now that new governmental stimulus packages can offset the negative economic prospective brought by the second wave.
This situation is especially true in the US where many investors, desperately waiting for further support from the government, are increasingly concerned a phase 4 stimulus may not happen before 2021, which would be likely to put a strong pressure on stock markets and the rest of the economy for the end of the year. Technically speaking, most European markets are now trading close to major support levels that have been preventing prices from drifting lower since June.
While a rebound over these zones remains the most likely scenario on the short-term basis, a break-out of this level would unlock a dangerous downside risk by triggering a new mid-term bullish trend following the summer consolidation.