Dollar tired of his own weakness

The dollar approached the major day of the week with an impressive increase in optimism. A sharp decrease in political tension and the extension of the government's financing period for 3 months are adequate enough to exhibit signs of changes in sentiment regarding the prospects for the world's major currency.

On the eve of US President talks, Trump held talks with Democrats which is skillfully disguised as a friendly dinner. Apparently, the draft tax reform has passed preliminary approval that has significantly increased the chances of passing it in the Congress. According to CME, The market reacted instantly since there is a probability of an increase in the rate in December rose to 47% that clearly showed a change in mood.

Meanwhile, it seems that the actual macroeconomic indicators are not convincing enough. The producer price index in August rose since May which supports the price recovery after the failure but still did not impress the market. Prices rose by 2.4% year-on-year, which is significantly higher than July's 1.9% but below market expectations of 2.5%. Therefore, growth again appears insufficient to justify inflationary expectations.

analytics59ba0e612de9f.png

Today, a report on consumer inflation in August will be published while the forecasts are neutral. Experts do not expect a noticeable increase in the July report instead, it is assumed that the inflation remains below the long-term average and below the target set by the Fed. Before the key autumn meeting of the Fed that will happen in less than a week, the data on inflation will significantly affect the mood of investors. Published on the eve of the business optimism index from NFIB, it showed that small business still expects a successful start on reforms. The data of the index showed a slight increase to 105.3 in August, against 105.2 a month earlier. Also, it holds near the maximum set immediately after the victory of Donald Trump elections last November.

The issue of reforms does not only concern Trump, but for the economy as a whole. The fact that Congress agreed to raise the ceiling on the national debt is an indicator of the uncoordinated position of Republicans and Democrats. A countermeasure were enforced whose goal is not to allow a government default and have time to consider and adopt a plan of action for reforming the economy in the next three months.

The fact that things are not going as they wanted can be observed from the dynamics of freight traffic across the United States. As follows from the data provided by the American Association of Railways, the volume of freight traffic this year barely exceeds the level of 2016 and significantly lags behind the two previous years.

analytics59ba0e720cb4d.png

The real economy looks weak which is not a secret for Trump, for the Fed and for Congress. In place of monetary stimulus measures, fiscal stimulus must be introduced. Hence, the warring parties in Washington are ready to sit at the negotiating table but at least the events of the last week clearly indicate progress on a number of key issues.

In fact, the dollar bulls were waiting for this particular moment. If it turns out that consumer inflation has a positive momentum today, the dollar will react to a sharp increase, as the market decides that the weakening of the trend is about to end.

Reports on retail sales and industrial production in August will be published on Friday. The forecasts confirm the conclusion that the expected weak figures of the experts for both groups of data will affect the deterioration of consumer sentiment in the end. In fact, there is less time for fluctuations, but one must assume that the market as a whole has already played out both excessive expectations for Fed's monetary policy tightening and the real weakness of the American economy. The dollar weakened for 8 consecutive months and now, it's time for positive news which will help turn global expectations.

Nevertheless, the dollar will not show confident movement before the meeting of the Fed on September 20 and it will most likely spend the remaining days in a wide range. Strong volatility is possible and the direction the market will be determined not earlier than a week.

The material has been provided by InstaForex Company - www.instaforex.com