Weekly review of the foreign exchange market from 11/26/2018

All sorts of political events continue to have the strongest influence on world markets, especially currency. True, the loudest and burning political news directly affects what will happen to the economy of the whole region. This, of course, about Brexit. In the middle of the week, it became known that the negotiators from the UK and the European Union came to an agreement, and Donald Tusk immediately declared that it would be considered by the EU countries on Sunday. Right there, it became a reason for the sharp growth of the pound, as it is obvious to investors that even a bad agreement is better than its absence. The next day, the mood began to change, and the pound with the single European currency began to gradually lose its position. In general, the growth of the pound is explained solely by emotions, since a careful examination of the points of the agreement makes it clear that on economic issues, the current version is tantamount to the absence of any agreements. The latest version of the agreement, which Europe eventually adopted, is a banal political declaration of intent. The most interesting thing is that in the text of the agreement, there is not a single word about free trade. In other words, if some fundamental changes do not happen and Europe and Great Britain act according to the plan, then British companies will find themselves on the continent in the same position as companies from the rest of the world. This means that their goods will be subject to duties and no tax benefits will not shine. Last but not least, a whole range of British goods can be shipped to Europe only within quotas. Exactly the same conditions will be in the event that the so-called divorce process happens without any agreements. So from an economic point of view, that this agreement is, that it does not exist, there is no difference. It is not surprising that as soon as the emotions subsided and investors were more attentively reading the text of the agreement, the pound began to lose its position.

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Given the content of the most important part of the agreement between Europe and the UK, it is surprising that the single European currency did not grow. Although these are all emotions. After all, the result of this scenario is the loss of the position of British companies on the continent. The vacant space will immediately be taken by companies from other European countries, many of which are experiencing serious difficulties. Suffice it to look at the controversy surrounding the Italian budget deficit, from which, to no avail, they are trying to reduce it to an acceptable level. So the European countries themselves are economically interested in such an outcome, as this can improve their own finances. It was gratifying that Jean-Claude Juncker directly stated that this was the best agreement that the United Kingdom could count on. Apparently, implying that the worst option was a ban for British companies to conduct any activity on the continent. In this regard, it is really not clear from what the euro did not grow. But everything falls into place if you read the text of the minutes of the meeting of the European Central Bank, which was published immediately after the news of an agreement between Europe and the UK. It follows from it that the possibility of curtailing the activities of the quantitative easing program, following the December meeting, is rather illusory. Therefore, there is no reason for joy.

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The significance of reaching an agreement between the European Union and the UK is so great that it overshadowed the macroeconomic statistics, a look at which will not be superfluous. Especially since it was extremely weak, especially for the United States. So, although the number of new buildings increased by 1.5%, the number of building permits issued decreased by 0.6%. The number of repeated applications for unemployment benefits, of course, decreased by 2 thousand, while the number of primary applications increased by 3 thousand, so the total balance increased by 1 thousand. Orders for durable goods collapsed at 4.4%, which is very sad. But to complete this sad picture, we can recall the preliminary data on business activity indices, which showed a total decline. In particular, the index of business activity in the services sector fell from 54.8 to 54.4, and the industrial index from 55.7 to 55.4. As a result, the composite index decreased from 54.9 to 54.4. True, similar data for Europe showed not the best result. The business activity index in the service sector fell from 53.7 to 53.1, while in the industry, it fell from 52.0 to 51.5. As a result, the composite index decreased from 53.1 to 52.4. The British also had something to grab their heads for, as Rightmove data showed a decline in house price growth from + 0.9% to -0.2%. And this is in annual terms. But the state of the housing market is one of the main criteria for the investment attractiveness of the British economy.

Of course, I just want to say that Brexit will determine the mood of investors this week. But this is far from the case because the British Parliament will consider this issue only in early December. The exact date is still unknown. Naturally, individual parliamentarians, especially from amongst ardent fans of Theresa May, or rather her resignation, can again tell the devil that she knows what will be another reason for panic. But it will have only a temporary and minor impact. So it is worth focusing on macroeconomic statistics. Here, there are all the prerequisites for the further growth of the dollar. The next estimate of GDP for the third quarter should confirm the acceleration of economic growth from 2.9% to 3.0%. Sales of new homes should increase by 4.3%, however, here S & P / Case-Shiller can state the fact of a slowdown in housing prices from 5.5% to 5.3%. Also, personal income, as well as expenses, may increase by 0.4%. Well, the main event of the week will be the publication of the text of the minutes of the meeting of the Federal Commission on Open Market Operations. There is no doubt that it will reflect the commitment of the regulator to the previously planned plans to tighten monetary policy. Another confirmation, documentary, and official, will give the dollar confidence.

But in Europe, there is practically no data, but they will have the strongest influence on the mood of market participants. On the one hand, the unemployment rate should decrease from 8.1% to 8.0%, which, of course, is good news. However, preliminary inflation data may show its decline from 2.2% to 2.1%, which, in fact, removes any questions about the fate of the quantitative easing program. The slowdown in inflation is precisely the very negative factor that will force the European Central Bank to renew its effect once again. Of course, the point is not inflation, but the debts of the members of the European Union, but inflation will be made guilty of all sins. So, the single European currency will most likely have to go down to 1.1275.

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What the British politicians can do, there is only God that knows, since their behavior has long been incompatible with even the framework of formal logic. But one can hope that once decided to consider the issue of an agreement with Europe only in early December, while they will behave well. But with the British statistics, everything is much clearer. True, this does not get any easier, since the net volume of consumer lending should be reduced from 4.7 billion pounds to 4.5 billion pounds. Also, although BBA showed an increase in the number of approved mortgage loans from 38,712 to 39,697, data from the Bank of England is likely to show a decline from 65,269 to 64,550. So, from a macroeconomic point of view, there are no grounds for a pound to grow. Therefore, it is worth waiting for the decline of the pound to 1.2775.

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