A “blue wave” is finally here now that the Georgia Senate election results are out and the Democratic Party managed to win them both. This clears out the path for Joe Biden to implement his agenda, with potentially massive implications for the performance of the US dollar. The holidays are over and if you’ve already made up your FX trading plan for the new year, it is time to talk about the US dollar prospects.
More stimulus on the way?
Based on the latest headlines, the new US President promised economic stimulus worth “trillions of dollars” and the first step is expected to be the increase of stimulus checks from $600 to $2,000. Financial markets are pricing in heavily dollar devaluation and the DXY weakened at the beginning of this year.
However, some short-term support seems to be emerging around the 89.5 area and dollar bears should be careful as the index reaches a key support area, that held pretty nicely in Q1 2018. In fact, that is where a dollar run higher had started, lasting until March 2020. The main narrative in the market is that with a “blue wave” materialized, there will be massive dollar spending, including infrastructure, and that should put further pressure on the global reserve currency, stimulating the already overbought risk sentiment.
The 2008 precedent
Even though inflation expectations are on the rise as the economic activity should get back to normal by the end of 2021, the US dollar performance for this year should not be taken for granted. In 2008, Barack Obama became a Democratic President replacing George Bush, he had a majority in both the House and the Senate, spend massive amount of dollars in deficits, while the Fed was doing several QE programs, and yet, the US dollar moved up over years, erasing all the losses.
At this point, it is important to remain open to any scenario, mainly because we live in a relative world. The USA has many issues (social inequality, high debt-to-GBP, massive fiscal and current account deficits, etc.) yet all those problems can be found all over the world. As during the 2008 financial crisis, the Fed stepped in first and then allowed the other central banks to ramp up their stimulus.
One of the main areas to watch will be the EU, which is where we find countries more indebted than the US, more political fragmentation, and a severe economic drop in 2020, which could extend into this year as well. The ECB will very likely increase its money printing programs, devaluating the Euro to speed up the economic recovery.