Optimism in the markets will be strong, but short

Investors are becoming more and more entrenched in the thought that in the wake of the strong volatility of financial markets, as well as signals about the slowdown of the US economy, in particular, the world economy in general, the Fed will suspend the process of raising interest rates in the new year. These expectations have become the strongest driver for the growth in demand for risky assets and the weakening of the US dollar.

If there is not yet full confidence regarding the positive resolution of the trade dispute between the States and China, the Fed seems to be captivated by investors' reluctance to put up with declining dollar liquidity and the process of raising interest rates. In fact, watching what happened in December last year, we can say that the market pressure on the Fed has completely failed. Extensive sales on the stock market resembled a coordinated game, the purpose of which was to force the regulator to stop further increases in interest rates, as well as a reduction in the balance sheet, which was previously the reason for the rise in the dollar rate and the increase in the yield of US Treasury government bonds.

High volatility at the end of the year forced a number of heads of federal banks to start a discussion about the need for a further process of raising interest rates. Against this background, the head of the Federal Reserve, J. Powell, last Friday was also forced to state the need for a balanced approach to monetary policy. In general, everything indicates that the effect of the quantitative easing programs conducted by the American regulator after the acute phase of the 2008-09 crisis, as well as the tax reform carried out by D. Trump after coming to the White House, has completely dried up. The States, as well as the world economy as a whole, faced a problem that was previously actively discussed, the essence of which is that the post-crisis recovery of the US economy, as well as the world economy, will not be so long, and everything will return to the problems that as then at the end of the "zero", they thought that they overcame, but really only just poured "cheap" money.

Considering such perspectives, we believe that in the current situation even reaching a trade agreement between Washington and Beijing will not be able to resolve existing contradictions and problems. So, with a high degree of probability, stopping the process of raising interest rates will only provide temporary support to stock markets. But in this, as we see it, for a short period the dollar will remain under pressure, which will lead to its local, noticeable decline against major currencies.

Forecast of the day:

The EUR / USD currency pair broke out of the range of 1.1350-1.1475 in the wake of the weakness of the dollar and the market expectations of a halt in the Fed rate hike. For further price growth to 1.1615, it needs to stay above the level of 1.1525.

The USD / JPY currency pair is trading below 108.15. It may continue to local decline to 106.80 if held below this mark.

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