The dollar goes on the offensive

Despite the weak macroeconomic indicators published this week, the US dollar intends to regain its status as a favorite before the FOMC meeting on December 12-13.

The deficit in the US trade balance rose to $ 48.7 billion in October due to a record increase in imports, exceeding the forecasts of experts. The negative result, however, did not lead to the sale of the dollar, as the market quickly found an explanation: the growth of imports indicates a high consumer activity which intensified in the pre-holiday sales period.

A little more worrisome is the slowdown in business activity in the services sector. The ISM report showed that the index fell in November to 57.4p, which is noticeably below the data of a month earlier at 60.1p and worse than analysts' forecasts who expected it to experience an insignificant slowdown to 59p. However, in this case, the market reacted calmly as some correction after two months of active growth is quite understandable.

Obviously, players prefer to concentrate on the main factors that matter before the upcoming FOMC meeting which will take place next week. These include GDP growth, inflation, and the labor market situation.

The growth of the economy intensified after two rather weak quarters. According to the forecasts of the Federal Reserve Bank of Atlanta, a GDP growth of 3.2% in the 4th quarter is expected. Danske Bank is waiting for 3% with a total of 2.2% in 2017 and - 2.4% in 2018, since private consumption is not the main factor of economic growth now. A steady increase in investment after the recession caused by a decline in oil prices plays an important role in all of this.

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The level of expectations from reforms is still high. The survey data from the NFIB and the Conference board show that, despite the lack of real progress in reducing the tax burden, optimism has been at its highest level in the last decade. Trump actually intends to follow the path of Ronald Reagan who achieved revival in the economy by reducing taxes, which incidentally, led to a sharp increase in the budget deficit. The Budget Committee of the US Congress assumes that the national debt will grow to 99% of the GDP over the next 10 years but this does not seem to bother anyone seriously.

On Friday, a report on the labor market will be published. Experts' forecasts can be called confidently optimistic. It is expected that in November, 198,000 new jobs were created. This is very strong at the current level of unemployment. Also, the average hourly wage is expected to increase by 0.2% to 2.6% which is more important in conditions of weak inflation. If the published data are no worse than forecasts, the dollar will get a strong driver for growth as it will strengthen the position of the hawks of the Fed.

According to the CME futures market, optimism on the rate among investors is growing. The probability that at the meeting on December 13 the Fed will raise the rate is above 90% at the moment. Moreover, the forecast for March became even more pronounced with more than 50% of the probability in favor of another increase.

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This result perfectly reflects the real mood of investors. They expect that the growth of the US economy will allow us to pursue a policy of normalization at a faster rate than the ECB or the Bank of England, which will lead to an increase in the yield spread in favor of US assets.

In other words, investors are confident that the dollar has more than enough reasons for outstripping growth. The continuation of the current policy of the Fed after the resignation of Janet Yellen in February 2018 no longer causes fears. The tax plan surprisingly easily passed through the Congress and only the president can prevent the dollar from returning to Olympus.

The EURUSD pair may drop to 1.1670 in the short term. In the longer term it may make an attempt to update the November low at 1.1550. Against the yen, the dollar's position is not so convincing, as tightening financial conditions may cause an increase in interest in defensive assets. Most likely, trade will continue in the lateral range.

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