The Week Ahead: US Stimulus Spending Comes At a Price

SPX 500 halts on news of tax hike

After flirting with a new record high at 4200 the rally may have hit a roadblock after news of US tax rises. In a historic move to revamp the fiscal policy, US President Joe Biden will propose to nearly double capital gains taxes to 39.6% for people earning more than $1 million.

Somebody will need to write the cheque for the administration’s ambitious agenda. Whether this hike could eventually pass through Congress is anyone’s guess, but the spook effect may prompt big money to cash in and trigger a sell-off.

In case of a retracement, the area between 3860 and the rising trendline is the first test of buyers’ commitment.

EURUSD rises on resilient data

The euro continues to recover against a weaker US dollar. After short-lived volatility, markets have shrugged off comments from a dovish ECB that a reduction in the bond-buying program would be “premature”.

After all, the central bank was expected to see through the Covid uncertainty before deciding whether to take the foot off the pedal.

On the data side, the eurozone’s PMI for the service industry has shown resilience despite new restrictions. Better growth and inflation rates this week may further lift the euro.

A breakout above 1.2110 could extend the rally to 1.2350. Failing that, 1.1880 would be the closest support.

USDJPY retreats ahead of BoJ meeting

The US dollar’s latest retreat has led to a stronger yen much to Japanese policymakers’ dismay.

A weaker yen has always been key ammunition to fire up growth. With the recent nomination of Asahi Noguchi, an advocate of aggressive easing to the board of the BoJ,  we can expect the central bank to lean towards bolder stimulus. This will be in a bid to support job growth and achieve the elusive 2% inflation target.

This, in turn, could create headwinds for the yen. The pair has met stiff selling pressure near March’s high at 111.00. The area between 38.2% (107.70) and 50% (106.80) Fibonacci levels could see a pickup in buying interest.

AUDUSD recovers on better risk sentiment

The Australian dollar has recouped most losses from late March as sentiment on commodity-related currencies improved.

After the Bank of Canada fired the first shot in tapering its QE program, the market is naturally pondering who will be the next. With its success in managing the pandemic and a boom in the jobs market, Australia is definitely on the correct path.

An upbeat CPI reading this week could push the RBA into a more hawkish stance. The Aussie is testing the key resistance at 0.7840 and a bullish breakout could trigger an extended rally.

On the downside, 0.7570 is a major support for the current uptrend.

Trading the news requires access to extensive market research - and that's what we do best. Open your Orbex account now.