The pound climbed too high

The Fed, as expected, kept the benchmark interest rate target between 1.00% -1.25% at its meeting that was concluded yesterday, and no significant changes were made to the text of the accompanying statement. The Fed noted that the fall in employment in September is a consequence of the hurricanes, and therefore will not affect economic data.

The dollar did not react to the results of the meeting, as it is preparing for two more important events that will take place on Thursday. As expected, President Trump will announce his choice for the chief of the Fed, and depending on who takes the position, centrist Powell or more hawkish candidate Taylor, the market would provide a distinct reaction in the form of the strengthening the dollar. Also set for Thursday, Republicans will present in the Congress, a detailed plan for the tax reform, this event is capable of causing positive growth and will contribute to the growth of the dollar.

Eurozone

Macroeconomic indicators for the euro area this week are quite contradictory. According to the European Commission, the business climate is improving, which follows from the results of studies published in October for October, and also supported the release of Eurostat preliminary data on eurozone GDP for the 3rd quarter, which were better than forecasts.

At the same time, inflation unexpectedly slowed down more than forecasted - the base index for the euro area fell to 1.1% from 1.3% in September, which raises the pressure on the euro.

Given the strong positive expectations for the dollar, the possible corrective growth of the euro is limited to a level of 1.1750, any attempts at strengthening will be used for selling, the chances of updating the October low at 1.1575 are quite high.

United Kingdom

The Bank of England at Thursday's meeting will likely hike the interest rate by a quarter point, responding to a reduction in the unemployment rate and growing inflation.

At the same time, opinions on whether the Bank of England is prepared to begin the cycle of raising, or limited to a single intervention, are divided, and it is from this assessment that the fate of the pound following the meeting will highly depend on. The majority of the market expects voting to end with a score of 7/2 that is in favor of the increase, and the central bank will be extremely cautious in its assessments, without providing any hints as to when the second hike will take place.

According to the consensus opinion of the market, the UK economy is not prepared for a new cycle. Wage growth significantly lags behind the growth rates of inflation, and therefore, there is no confidence in sustainable consumer demand. Furthermore, inflation, in fact, is largely due to the consequences of Brexit (a drop in the purchasing power of the pound and the related rise in the price of imports) compared with internal causes. Published on Tuesday, the consumer confidence index of Gfk Group clearly indicates that consumer confidence in the last 5 months is at a consistently low level and there is no reason to expect changes in the short term.

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Also on Thursday, the release of updated macroeconomic forecasts and the press conference of Mark Carney is expected. The logic of the situational assessment suggests that the inflation forecast may be raised in the short term in order to justify the rate hike, but it will remain unchanged for a long time, which will eventually provoke a sell-off of the pound.

The most likely scenario, therefore, is that the market will use the rate hike to lock in profits, after which the pound will surrender its winning positions, and the initiative will go back to the dollar, the potential growth is limited by a resistance of 1.3440/50.

Oil

The report of the Ministry of Energy of the United States was slightly worse than the report published by the API from the day prior, and thus led to profit taking. At the same time, there are still very few reasons for a reversal and a significant decline in prices. OPEC continues to maintain a consistently low production level, not allowing the market to feel saturated, the prospects for an extension of the OPEC + agreement still appears high, the aggregate demand from Asian countries continues to grow.

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