11.01.202117:09 Forex Analysis & Reviews: Dollar correction may stretch for months

The transfer of power to US President-elect Joseph Biden is not going smoothly. However, the supporters of Donald Trump failed to stretch and intensify the conflict, so there is no noticeable departure from the risk. Investors welcomed the victory of the Democrats in the elections in Georgia. Power is being transferred entirely to representatives of the Democratic Party, which will make it easier to provide incentives for the pandemic-hit economy. Biden has already promised trillions of dollars in new support measures.

Meanwhile, the expectation of new measures contributed to a jump in inflation expectations and accelerated the growth of dollar yields. It is worth noting that the political instability has not yet been played out, it may continue, as the inauguration of Joe Biden is ahead. The existing factors provoke a long-overdue correction of the dollar, which has long looked overly oversold.

The beginning of the new week was characterized by a breakout of the 90-point mark on the dollar index. It is likely that the upward trend will be medium-term and will last throughout January. Some currency strategists assume that the growth of the dollar will spread not only for weeks but also for months.

"The dollar is ready for a real rebound, on which you can make good money. The currency will rise for several weeks, or even months," writes Miller Tabak + Co.

Potential targets of correction for the dollar index averaged 92 points.

The US dollar rises along with the yield on Treasury bonds. Last week, yields jumped 20 basis points, the most significant increase since June 2020. Such dynamics forced traders to reconsider their "bearish" positions on the dollar and sell-off some of the risk-sensitive assets, including the currencies of the EM sector.

Speculative players rush out of short positions. Margin funds are reducing long positions on the euro and the pound, increasing demand for the dollar, according to data from the Commission on Futures Trading.

The EUR/USD pair broke down the 1.21 mark on Monday. Thus, the euro will have to pass a stability test

The growth in yen is even more pressing. The USD/JPY pair has broken upwards at 104. At the same time, experts advise against rushing to buy the yen against the dollar. The growth of the pair is also associated with the weakening of the Japanese currency. This was facilitated by heavy snowfalls in the country with canceled flights and the publication of weak macroeconomic statistics. At any time, the initiative may again be on the side of the sellers of the USD/JPY pair.

To bolster the strength of sellers, factors are also needed to lower the dollar. It's not crowded yet, but on January 14, Biden promised to hold a press conference at which he should officially present a new plan to stimulate the economy. If we are talking about trillions of dollars, then the US dollar will have a wave of sales.

Of course, faster and larger adoption of new stimulus could slow down or even limit the dollar's correction. However, it is unlikely that the focus will now be shifted to incentives when the focus is on the political issue. The greatest concern among congressmen now is the safe transfer of power.