The main events of the past week unfolded on Wednesday and Thursday when the meetings of the Federal Reserve, the ECB and the Bank of England were held. Contrary to all expectations, the events that happened on the market was completely unpredictable. As soon as the Federal Commission for Open Market Operations announced the raised in refinancing rate from 1.25% to 1.50%. In addition to that, the news about the three-time increase next year was mentioned, and the dollar began to lose its positions immediately which was extremely strange. After all, assuming that the rate hike was previously taken into account by the market, the rate should remain unchanged. It was said that investors were afraid of three more increases next year, as the US economy is unable to cope with an even greater tightening of monetary policy. But about such plans, the Fed knew about this a month before the meeting, since it was indicated in the text of the minutes from the November meeting. In general, the decisions of the Fed fully coincided with the expectations. Hence, the weakening of the dollar can be entirely linked to the ECB meeting, which took place the next day. Everything seems clear with the Fed's policy, but it remains to be seen what the ECB will do, and it really hopes that Mario Draghi will announce the possibility of raising the refinancing rate even under the conditions of the quantitative easing program, which also become an excuse for weakening the dollar. But the ECB did not live up to expectations. As soon as it became clear that the ECB would continue to adhere to the current policy, everything will return to normal. Approximately, the same happened with the pound, and although everyone understood that one should not expect any action from the Bank of England in the near future, one had to understand and wait for the next increase in the refinancing rate. And the answer was received on Friday. According to Haldane, this became clear in the foreseeable future, even though this is not worthy because the Bank of England is too concerned about the consequences of Brexit. As a result, the pound, with a delay of a day, returned to the values prior the meeting of the Federal Commission for Open Market Operations.
However, take note of the macroeconomic statistics, although few people are worried, but can have a strong impact on the market over time. Thus, the growth rates of US producer prices accelerated from 2.8% to 3.1%, and inflation from 2.0% to 2.2%. At the same time, the growth rate of retail sales accelerated from 4.9% to 5.8%. So, the Fed's actions are completely justified and reasonable in terms of tightening monetary policy. The Bank of England stubbornly refuses to raise the refinancing rate although inflation has already accelerated from 3.0% to 3.1%. Moreover, the unemployment rate remains at around 4.3%, while the decline in retail sales by 0.3% was replaced by a growth of 1.6%. Every factor that indicates Bank of England is losing control over the situation, may turn into a galloping surge in inflation. However, the Bank of England seems to be refusing to face the truth. Basically, similar questions can be addressed to the ECB, as Mario Draghi's department continues to adhere to the super-soft monetary policy. While the rate of growth in the industrial production accelerated from 3.4% to 3.7%, which could lead to an overabundance of goods, threatening a new deflationary spiral.
After such an intense week, one should wait for a certain lull, especially since investors should take a breath. However, the dollar will be under pressure and expected to reduce by 4.9% and the number of issued construction permits by 3.7% of new construction projects, and by 1.4% of home sales in the primary market. Nevertheless, the pressure will be fragmentary, as the GDP data for the third quarter should confirm the fact of increasing economic growth from 2.3% to 2.6%. Also, growth durable goods orders is forecasted at 1.6%. Thus, the dynamics of the dollar will be big enough as determined by European statistics.
However, the most important news has already come out, which is the inflation in Europe. As expected, inflation accelerated from 1.4% to 1.5%, which somewhat corrected the position of the single European currency. As of this writing, the GDP data for the UK is scheduled on Friday, which is expected to demonstrate a sustained growth rate of the United Kingdom economy at 1.5%.
With this, the market will be relatively stable and quotations will remain nearly unchanged just like the end of last week.
By the end of the week, the euro / dollar pair will be at the level of 1.1750.
The pound / dollar pair is stabilizing at 1.3350.
* The presented market analysis is informative and does not constitute a guide to the transaction.