The correction in the US stock market caused a noticeable strengthening of the US dollar. It seems that this trend may continue until the Fed meeting next week.
What happened?
The signals of a clear slowdown in the US economic recovery are scaring investors and have triggered the start of sales in the local stock market. An additional negative factor was the aggravation of tension between Washington and Beijing again, initiated by D. Trump. His threats to ban the placement of government orders in companies closely related to the Chinese and factories caused a drop in shares of technology companies in the NASDAQ index, which became the basis for a decline in the overall local stock market. On this wave, stock indices in the United States lost more than 5%, and it seems that this is not the limit. They will most likely decline on average by around 5% before the Fed's meeting, which is precisely the main reason for the strengthening of the dollar.
The dynamics of the US stock market had a widespread impact on world markets, causing a fall in Europe and Asia. We believe that the continuation of such sentiments will stimulate further local strengthening of the dollar, which will be suspended only by slowing down the fall of the US stock market.
What to expect?
In our opinion, events before the meeting of the ECB and then the Fed will not have a noticeable impact on the market's mood. With regard to the ECB, this is due to the high probability of a signal from the regulator that measures to support the region's economy may be expanded. This will cause negativity for the rate of the single currency, the fall of which in pair with the dollar will only strengthen in view of the current negative sentiment in the market.
Meanwhile, with regard to the Fed's decision on monetary policy, it can be noted that the regulator will most likely record a slowdown in recovery processes in the labor market, and in the economy as a whole. It is difficult to say whether he will report on the possibility of expanding incentives, but if the situation worsens, he can try to come up with something. In this case, the dollar's strengthening will stop and we can expect a recovery in demand for risky assets followed by a general decline of the US currency.
Forecast of the day:
The AUD/USD pair remains under pressure. The worsening tension between the United States and China has a negative impact on the Australian economy and, through it, on the exchange rate of the local currency. Thus, we believe that a decline in the pair below 0.7200 will lead to a further decline to the level of 0.7150.
The USD/CAD pair is growing amid general increase in demand for dollars, as well as ahead of the meeting of the Central Bank of Canada. We believe that its result is unlikely to be positive for the Canadian currency, which, like other major currencies, will remain strongly influenced by the events described in the article. The pair rose above 1.3235 and its consolidation above it will become the basis for the price further growth to 1.3340.