The dollar is doomed to be strong

On January 28, the Congressional Budget Office will issue an annual forecast for the economy and budget for the period to 2029. In light of the upcoming debates on the national debt ceiling and the continued shutdown of the government due to the fact that the budget for the 2019 fiscal year has not been adopted, an assessment of the prospects for filling the budget and servicing the public debt, since the monetary policy of the Fed will depend directly on the key parameters of the state of the US economy.

Despite the fact that the volume of US government debt exceeded 21 trillion, its service, according to calculations, is not burdening for the budget. The cost of servicing public debt depends on the gap between the real interest rate on debt and the rate of income growth. If US incomes grow faster, then interest payments on debt are not a serious burden for the budget. The graph shows a measure of the cost of debt service (blue line), and it is in negative territory, that is, according to official statistics, the growth rate of real GDP per capita is ahead of the Fed's normalization policy.

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At the expense of what GDP growth rates remain high? It's not at all due to the Trump administration's new policy, since the real economy has been degrading since the autumn of 2014. This moment is well tracked by the ratio of the cost of intermediate goods in the industrial sector to total income (red line). In other words, the growth of real GDP, which allows servicing public debt, completely depends on growth in other sectors of the economy, real estate, insurance, finance, which largely depend on the stability of the dollar and its relevance at the global level.

From here you can make a simple conclusion, despite the declared goal of re-industrializing the United States and achieving the growth of all key indicators of the economy when this plan is implemented, the Trump administration is doomed to preserve the global role of the dollar. That is why the trade war with China cannot be resolved on the basis of supporting imports from the United States, that is, even China's readiness to increase imports by 1 trillion over 6 years to correct the trade balance will not have a noticeable effect on the budget's ability to service the growing debt. This effect can only have the preservation of the dominant role of the dollar in world trade, which can not be saved if the dollar begins a serious weakening against a basket of currencies.

The dollar, therefore, is unlikely to begin to decline, even if the Fed revises its rate targets. A similar scenario will suit both Europe and China, which will be forced to restrain the strengthening of their currencies in the face of the threat of a global slowdown in the global economy.

Eurozone

The euro is trading neutral before a key meeting of the ECB. The last benchmarks, which can influence the position of the bank, turned out to be more negative than neutral - the composite PMI index for the eurozone has previously been reduced from 51.1p to 50.7p, which is a 66-month minimum.

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Prospects for the euro on the basis of the meeting will be assessed by changing the balance of risks to the eurozone economy. If there is a downward revision, it will inevitably cause a revision of the euro's prospects also downward, if the risks remain "balanced", the euro will respond with growth. As long as EUR / USD looks neutral, an out of 1.1335 / 95 range will be formed after the meeting.

Great Britain

The British pound continues to receive support after Theresa May managed to keep her post after a failed parliamentary vote. Keeping control over the government and eliminating the threat of repeated elections increases the likelihood that additional negotiations with the EU can be held on Brexit or even a repeated referendum.

Until January 28, the pound will continue to be in demand against the background of risk reduction, but this demand cannot be considered sustainable. All the same, facts, not expectations, play the decisive role. GBP / USD got too strong resistance of 1.3090 / 3110, a probable breakdown of this zone will open the way to the November maximum of 1.3170.

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