Weekly review of the foreign exchange market from 10.29.2018

The triumph of the dollar. This is the only way to describe the results of the past week. Especially if you judge by the pound, which suffered the most. And this suggests that a significant contribution to the strengthening of the dollar was made by the UK. This is not surprising, as everything points to the development of a full-fledged political crisis in the United Kingdom. The controversy over Brexit has long gone beyond the discussion of individual items of an agreement with the European Union. It feels like the opponents of Theresa May, of whom there is a majority in parliament, are not interested in the agreement itself. They don't care what it is. In any case, some will consider it too hard and others too soft. So the prime minister of the United Kingdom can submit any agreement that she wants, it will not be accepted anyway. Many are already openly talking about the imminent resignation of Theresa May due to her insolvency and helplessness. So, political opponents have long aimed at removing the prime minister, and negotiations on Brexit are only a pretext. They use banal sabotage of negotiations as a tool to achieve their personal political goals, and it doesn't matter that the absence of a trade agreement will cause enormous damage to the UK economy, since Theresa May will be the one to blame. Furthermore, talking about a second referendum does not add confidence in the future. Indeed, from the point of view of investors, it is impossible to plan their investments in a country that every two or three years intends to radically change its policy, especially in those aspects that affect trade.


What is happening in the eurozone also makes a person clutch one's head. Thus, Brussels, which initially approved Italy's budget deficit of 2.4%, suddenly expressed its indignation and demanded to bring the draft budget in line with the requirements of financial stability. Such a drastic change of mood raises a lot of questions that have never attracted investors. Italy itself stands firmly on its own, since it cannot reduce social spending, which will have to be cut if the budget is revised. For any European policy, reducing social spending is automatically a political suicide. So they are not capable of going for it. Although this behavior only exacerbates the problem of public debt and leads to even greater consequences, primarily for the recipients of these very social expenses. And what is happening has already led to a decrease in the credit rating of Italy to the minimum allowable for investment. And if the credit rating is lowered by one more level, then Italy will simply have no place to take the money, since the largest investment funds will no longer be able to invest in the Italian national debt. These are the rules and regulations of European and American pension and insurance funds. They are not allowed to invest in assets with a credit rating below a certain level. Italy is just one step away from this threshold. Moreover, it will lead to selling of Italian debt securities by major investors. And, of course, this situation could not be avoided by Mario Draghi, who during his speech, after the meeting of the Board of the European Central Bank, mentioned the risks associated with the size of public debt in a number of European countries. At the same time, he did not give any guarantees that the ECB will fulfill its promise and will curtail the quantitative easing program. And, given the unfolding drama, few believe that this promise will be fulfilled. After all, the curtailment of the quantitative easing program will lead to an even greater aggravation of the debt situation. While the ECB prints money, European countries can count on guaranteed demand for their debt securities. As soon as the printing press is stopped, all of them, except Germany, will have to sharply increase the cost of their borrowing, which will make the service of public debt simply an unaffordable burden.

At the same time, everything seems pretty good in the United States. The first estimate of GDP for the third quarter was better than the forecasts and showed an acceleration in economic growth from 2.9% to 3.0%. Orders for durable goods also increased by 0.8%, indicating a temporary slowdown in inflation. However, it was not without negativity, as sales of new homes decreased by 5.5%, but against the background of GDP data and orders it is not as significant. Also, preliminary data on business activity indices showed an increase in the index in the service sector from 53.5 to 54.7, and the production index from 55.6 to 55.9, which gave an increase in the composite index from 53.9 to 54.8. But in Europe, similar data showed a completely different picture, as the index of business activity in the service sector decreased from 54.7 to 53.3, and the production index from 53.2 to 52.1, so it is not surprising that the composite index fell from 54.1 to 52.7. And the growth rate of consumer lending remained unchanged. In turn, the number of approved mortgage applications in the UK decreased from 39,241 to 38,505. So, the statistics also favoured the growth of the dollar.

The beginning of the week also promises to be very interesting, and not only because of the ongoing disputes over Brexit and public debts of the euro area countries, which will have a negative impact on the pound and the single European currency. After all, on Friday the report of the US Department of Labor on the state of the labor market will be published. Moreover, the forecasts on the content of the report are quite optimistic. Thus, the unemployment rate and the average working week should remain unchanged. At the same time, the growth rate of average hourly wages should accelerate from 2.8% to 3.1%, and this allows us to hope that the decline in inflation is temporary and nothing can change the Federal Reserve's plans for the pace of increasing the refinancing rate. Moreover, 190,000 new jobs should be created outside agriculture against 134,000 in the previous month. Equally interesting is the fact that personal income and expenses should increase by 0.3% and 0.4%, respectively. The outpacing growth in spending also points to the potential for rising inflation. Well, in the end, good news is expected as production orders are seen to grow by 0.4%. But do not think that everything is so cloudless in America. The growth rate of housing prices, according to S&P Case Shiller, should slow down from 5.9% to 5.8%. Also, ADP data may show employment growth of 189,000 against 230,000 in the previous month. But overall expectations are quite positive, so the dollar has potential for growth. especially if we recall the political squabbles in Europe.

Of course, Europe will continue to discuss the level of public debt. A particularly uninteresting aspect is the ability of these countries to service such debt. And it is no secret that such arguments greatly increase the likelihood of a heart attack in many, quite notably, investors. Although preliminary data on inflation can play the role of a balm on the heart, as they should show an acceleration from 2.1% to 2.2%. However, this will be of little interest to anyone and will only temporarily help the single European currency. After all, Mario Draghi almost confirmed that the program of quantitative easing will be extended. At least, such conclusions can be drawn after his statements. Also, the preliminary estimate of GDP for the third quarter should show a slowdown in economic growth from 2.1% to 1.9%. So even though inflation is rising, it is of little use as the economy slows down. Well, the unemployment rate should remain unchanged, although it can reduce the next revision of the previous values. So, given the rather optimistic expectations on US statistics, as well as the financial problems of Europe, we should not rule out the decline of the single European currency to 1.1275. If the data on the labor market in the United States will be worse than forecasts, and most importantly - show a decrease in the average hourly wage, the single European currency has every chance to strengthen to 1,1600.


The hysteria about the possible resignation of Theresa May, or rather her potential dismissal, in this direction by her political colleagues, that is, her opponents, naturally has a negative effect on the pound. Moreover, data on the lending market have already been released, which showed quite a variety of results. Thus, the total volume of consumer lending increased from 4.3 billion pounds to 4.7 billion pounds. However, the number of approved applications for mortgages decreased from 66,101 to 65,269. Also this week, data on business activity indices in the manufacturing sector and the construction industry will be released. Thus, the index of business activity in the manufacturing sector should decrease from 53.8 to 53.0. The index of business activity in the construction industry may decrease from 52.1 to 51.9. And not only that, activity in the construction industry should decline, so also the growth rate of housing prices, according to Nationwide, is likely to slow down from 2.0% to 1.9%. Well, the main entertainment will be, of course, the meeting of the Board of the Bank of England on monetary policy. The results are known in advance - no changes are expected. Moreover, Mark Carney once again decided to take an ostrich attitude and said that before the UK leaves the European Union, there will be no changes in the policy of the central bank. So the pound will have to drop to 1.2750. If the content of the report of the Ministry of Labor is not as expected, the pound will be able to return to 1.3000.


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