Panic is growing, in winning the dollar and yen

The sharp decline in oil prices increases the effect of slowing inflation expectations. The yield on 5-year inflation-protected bonds Tips dropped to a minimum since December 2017, lost 0.34 n from a peak in May, which indicates a high probability of seeing inflation in the month below forecasts.

The tendency adds nervousness to the players, the tonality of the speeches of the Fed members and so has changed after the meeting on November 8, there are more and more concerns about slowing down the economy or even recession next year. There is growing evidence that the tightening of financial conditions in Asia is leading to a slowdown in the markets of developed countries, new orders in the US will decline, and the ISM index will also go down.

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Current conditions contribute to the growth in demand for the dollar. Before the G20 summit, special attention will be directed to the rhetoric of FOMC members, if the market decides that the Fed is changing plans and is only ready for two increases, this could cause a sharp drop in Treasury yields while simultaneously increasing panic. Thus, commodity assets will be under threat, the dollar and especially the yen may be in high demand, gold prices may also rise.

EurozoneBusiness activity in the eurozone continues to fall. According to Markit, in November, PMI in the services sector fell to 53.1 n versus 53.7 n a month earlier, in the manufacturing sector, a decline from 51.3 n to 51.4 n, 25-month and 65-month lows were set, the composite index decreased from 53.1 n to 52.4 n, and this is a 47-month low.

The decline in business activity inevitably leads to a decrease in GDP, which, against the background of curtailing the asset repurchase program and the threat of slowing inflation, looks rather alarming for the economic prospects of the eurozone. The ECB has not even had time to begin the normalization process, and half of the advances from the incentive program are actually canceled.

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The direction of capital flows for the euro is negative, and this situation may worsen in the near future. There are two main reasons, the planned reduction in the Fed's balance sheet and, as a consequence, the monetary base decline, this effect imposed on the launch of the capital repatriation program will contribute to an increased demand for the dollar. The second reason is purely financial, the risk premium in the eurozone, calculated as a comparison of S & P500 and DAX futures yields with US and German futures yields for 30-year T-bills, is firmly in favor of the dollar, and even the recent fall in the stock market could not change the overall perception of risks.

Today, IFO will present its version of the economic activity in Germany, the forecast is negative. A little later, several members of the ECB will give a look at the financial situation (Novotny, Ker, and Pratt), Draghi will end the day, so the likelihood of euro volatility will increase by Monday evening.

The EUR / USD under pressure, growth is limited by resistance 1.1390, more likely to decline to 1.1270 with an eye to 1.1220.

Great Britain

As expected, the EU countries approved a plan for the UK to leave the European Union, despite a number of minor disagreements. The pound practically did not react to the results of the summit; a possible strengthening, if it nevertheless responds with some delay, is unlikely to be protracted. The chances of passing an agreement in the British Parliament are regarded as low.

Voting will take place in 2 weeks, all this time the political establishment will be busy with calculating probabilities, and members of parliament will desperately try to sell their votes more expensively. A negative outcome is likely to end with a sharp decline in the pound and the resignation of Theresa May, and possibly early parliamentary elections, a positive one, with a sharp increase in the pound. The second scenario is possible if the junior partner of the conservatives in the coalition is changed by the DUP party, which does not yet support the agreement.

At the beginning of the week, important macroeconomic publications are not planned, therefore the GBP / USD rate will be determined solely by political factors. An unstable equilibrium can be broken by some unexpected insider, in the absence of news, the most likely scenario is trading in a range with a slight upward trend. The pound is supported by the trend line at 1.2780, resistance 1.2910 / 20.

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