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The US dollar index received a strong boost on Monday, after the United States manufacturing PMI for December show that manufacturing activity in the American economy expanded at its fastest pace in six years.
December’s 57.1 PMI reading gave the greenback a much-needed boost on the foreign exchange market, after the US dollar index had fallen to its lowest trading level since February 2018 earlier on in the day.
The US dollar received further support after Federal Reserve member Charles Evans said that financial markets should prepare themselves for US rates to remain at “extremely low levels”, and that it will take a long time for US inflation to reach “an average of two percent”.
Monday also saw some wild two-way action in US equity markets, as the S&P500 reversed sharply from a fresh all-time trading high, while the Dow Jones Industrial Average traded in its largest one-day range since early-November last year.
The VIX also saw a major surge, as traders started to reprice riskier assets, ahead of the Georgia run-off. Fears over the Georgia election may have triggered profit taking amongst some traders.
Market were also intensely focused on COVD-19 infections on Monday, as Japan prepared to call a national emergency. British PM Boris Johnson held a press conference to address rumours surrounding another nationwide lockdown.
PM Johnson confirmed that the United Kingdom would go into a national lockdown on January 5th. The British pound had a notable soft day on the foreign exchange market against the euro and US dollar currencies in anticipation of the announcement.
The move lower in the British pound started to stabilize as UK PM announced another lockdown, as traders sold the rumour and bought the fact. Looking at a chart of sterling, a very bearish outside reversal candle has formed on the daily time frame, which could signal the start of more losses.
Gold and silver both had strong starts to the new trading week, with traders choosing to move into the safety of both metals as COVID-19 cases continued to spiral out of control.
Mining giant Rio Tinto also had a stellar day on the FTSE100, with miners helping to lift the index back towards the 6,600 level. The FTSE 100 and Ger30 did give back some gains on Monday’s close as risk-off sentiment started to pick-up.
Day Ahead
Traders will be intensely focused on the Georgia run-off today and the release of the United States ISM manufacturing report for the month of December. US politics will have the largest sway over market sentiment, although traders will be keenly awaiting the ISM report after December’s bumper US manufacturing PMI.
German unemployment and eurozone M3 money supply data later today is expected to take a backseat to the Georgia run-off later day as you may expect considering the implications for US politics.
Market volatility should be expected as the result of the Georgia run-off comes in. The VIX could come into its own, and the index is already showing signs of movement after jumping over twenty-five percent on Monday.
Some polls are showing that the Democrats are ahead in the Georgia run-off, and this has contributed to the volatility increase as traders and investors realise that they have mis-priced the possibility of a blue wave.
Whatever the outcome of today’s result in Georgia, you can be sure that the US dollar index will be receiving its fair share of attention from traders over the next twenty-four hours. The bear trend in the greenback has a shot at reversing over the next few days, however, a clean swipe by the Democrats could cause the greenback to sink much lower over the coming days, weeks, and months.
