In the wake of signals about the slowdown of the global economy in general (particularly the Chinese, European, and also American), problems on Brexit and expectations of the outcome of trade negotiations between Washington and Beijing, the dollar is almost not in demand amid the a situation of instability at the very least when previously the US currency received unequivocal support is strange.
In our opinion, this behavior of investors can be explained by the fact of realizing that dollar assets were traditionally interesting in difficult times as instruments of capital preservation and they did not risk doing this for two important reasons. First is the expectation of a change in the course of the Fed's monetary policy, which was taken by surprise as a factor in the decline in the growth of the national economy will be forced not only to not raise rates further but also to stop reducing its balance sheet. It seems that the markets believe that if the situation worsens further then the regulator will have to start lowering interest rates. It is possible that even it will go further and resuming some elements that support the economy, such as for example, the ECB has decided to launch the TLTRO banking sector support program.
Investors believe that in this situation the Fed has a safety margin. They can lower rates after they start raising in 2015 but such an opportunity, for example, the ECB does not. Hence, if the American regulator starts stimulating in the future then the dollar will be under more pressure than the euro.
Another equally important reason is the likelihood that Donald Trump, wishing to be elected for a second presidential term, will do his best to support the local stock market which puts pressure on the Fed and wanting to soften its position in monetary policy.
Observing the emerging trends, we believe that the period of uncertainty will continue, which will force investors to exercise a high degree of caution. In the foreign exchange market, this will manifest itself in the continuation of the overall lateral dynamics of currency pairs where the US dollar is present.
Forecast of the day:
The EUR/USD pair is trading above 1.1270. If the pair holds above this mark, it may continue its upward trend to 1.1330 while still remaining in a wide side range. At the same time, its decline below this level may lead to its limited fall to 1.1240.
The GBP/USD pair is likely to trade in the range of 1.2960-1.3115 this week while waiting for two votes in the British Parliament for Brexit. The pair will behave extremely unpredictable and reacting with trepidation to the news on rumors about Brexit.
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