US Open Note – Asian Covid breakout pauses dollar bears; BoC policy decision ahead

Covid, geopolitics feed some risk off

Alarming infection breakouts and new variants of Covid-19 in emerging economies threaten a déjà vu of the past in developed countries, or at least are warning of prolonged lockdown measures (see Japan) and a slow recovery from the pandemic despite the vaccination rollouts. Geopolitical conflicts in several corners of the world are adding to this complexity, forcing some investors to seek safety in the US dollar on Wednesday, though the demand for the currency remained weak, with the dollar index rising moderately on the day.

Influence from technicals

Perhaps, technicals played a key role as well, especially in the case of dollar/yen. The pair stabilized its meltdown near the surface of the Ichimoku cloud and the protective trendline, which joins the higher lows from January’s bottom, on the daily timeframe, signaling a potential upside reversal.

Likewise, euro/dollar is trying to rebound near the 1.2000 level ahead of the ECB policy decision tomorrow and hold above a tentative ascending trendline on the four-hour chart following the pullback off 1.2079, where the 61.8% Fibonacci retracement of its previous downtrend resides. Meanwhile, stronger-than-expected UK CPI inflation figures failed to boost pound/dollar towards the key resistance of 1.4000 earlier in the day.

The slump in Asian equities did not transmit to the European Union, where stock indices are mixed as traders balance the risks from a delayed reopening and the optimism from a strong earnings season. US futures were also lacking a clear direction ahead of the US open.

Bank of Canada's policy review

The Bank of Canada’s policy announcement at 14:00 GMT will be the highlight of the day as bond tapering rumors are currently running wild. Specifically, the Bank is expected to cut its weekly government bond purchases to C$3 billion and discontinue some other asset programs to fix its overloaded balance sheet and ease the risks in the booming housing market.

The scenario is well priced in; hence the event may not generate sharp volatility in the loonie. However, from a technical perspective, dollar/loonie seems to be exposed to additional upside corrections after the close above a long-term descending trendline. A break above 1.2625 will probably be the key for the next bullish action, though fundamentally for that to happen the BoC should announce a softer reduction in bond purchases and/or appear more dovish on the economy.

The latest decline in oil prices has also been weighing on the commodity-dependent loonie. Therefore, the EIA oil inventory report may be worth checking today at 14:30 GMT.

In metals, gold keeps testing the 38.2% Fibonacci retracement of the January sell-off around 1,784, a break of which could confirm an exciting bullish run towards the 1,818 barrier.


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