Weekly review of the foreign exchange market from 01/14/2019

Last week, the Federal Reserve made a lot of effort to weaken the dollar, and, judging by the results, quite successfully. The whole point is that the text of the minutes of the meeting of the Federal Commission on Open Market Operations was published on Wednesday. It is worth recalling that it was during the December meeting that it was decided to lower the rate of increase in the refinancing rate for 2019, and instead of three increases it would be only two. So, literally the day before the publication of the text of the protocol, the Fed representatives stated that they see all the prerequisites for the three increases in the refinancing rate. Ostensibly macroeconomic dynamics is quite favorable. And these words have somewhat encouraged investors, who immediately began to prepare for the publication of the text. But to their great regret, the text of the protocol reflects a completely different situation, since members of the Federal Reserve Board see just systemic risks, and they fear that a too rapid increase in the refinancing rate can be destructive. Also, the Fed's board has expressed concerns about stability in the financial markets, which may be violated by tightening monetary policy. And this is not unreasonable, since the stock indices, which have been falling since September, after the ECB's decision to curtail the quantitative easing program, began to fall at double speed. As a result, it became clear to everyone that there would be no question of any three raises, and disappointed investors once again continued to get rid of dollars. The minutes of the meeting of the European Central Bank Board, which was published the next day, greatly pleased market participants, as they found confirmation of the intentions of the European monetary authorities to start considering the possibility of raising the refinancing rate in late spring.


True, at the very end of the week, the single European currency rapidly began to lose its position, although the dollar did not manage to win back the losses of the previous days. The reason for such a sharp change in sentiment is in the letters that the US ambassador to Germany sent to major German companies. In these letters, the direct text states that the participation of German companies in the implementation of "Nord Stream - 2" will entail sanctions against these same companies. Since this project violates US economic interests. This incident has already caused a scandal, and the German Foreign Minister said that the US ambassador imagines himself "viceroy of the emperor of Washington." If we translate this whole situation into human language, then the picture is simply comic. Imagine that you came to the market for potatoes and go to the seller who has been buying them for many years. You have already known each other for so long that he even cleans these potatoes for you and brings them home. And here a new seller comes up to you, offers potatoes much more expensive, and he insists that you clean it and drag it yourself. And after you refuse, he beats you up and threatens that this will happen every time you buy potatoes from someone else. The situation with the sanctions around the "Nord Stream - 2" looks like this. But the most important thing is that the fact of sending such letters indicates Europe's dependence on the United States, which does not add confidence to the single European currency. By the way, on the accusations that the United States used threats and blackmail, the US ambassador to Germany said that he did not threaten anyone, but only signified American national interests.


If, however, move away from the central banks with their plans and the political twisting of their hands and look at the macroeconomic statistics, the picture is drawn as follows. Thus, the number of open vacancies in the United States decreased from 7,131 thousand to 6,888 thousand, while inflation decreased from 2.2% to 1.9%. So, indeed, without the help of the Fed, the dollar had no particular reason for growth. Although European statistics were not so optimistic, as the growth rate of retail sales decreased from 2.3% to 1.1%, but this was offset by a decrease in the unemployment rate from 8.0% to 7.9%. In the UK, where the rate of decline in industrial production accelerated from 0.9% to 1.5%, unexpectedly good GDP data came out, showing an acceleration in economic growth from 1.4% to 1.5%. So, as you can see, just one reduction in US inflation was enough to lower the dollar.

Practically no significant data is released in the US this week. You can, of course, pay attention to data on industrial production and retail sales, which are likely to show a slowdown in growth. Well, that's it. However, the American political class can bring a lot of surprises, especially since everyone will be waiting for some concrete facts about the threat of sanctions against European companies. Although this situation is more likely to adversely affect the ruble, but more on that later.

Europe, the situation around the Nord Stream - 2 also affects, however, not so much. Although the fact that Washington may indicate with whom and how European companies can work is not something new, earlier it was expressed much less. It's one thing to impose not just restrictions, but a ban on working with Iran. And a completely different thing, with Russia, which is among the ten largest economies in the world. Naturally, there are questions about the reliability of investments, as you invest, and the next day the next "signpost" from across the ocean derails all dreams and hopes. The situation is aggravated by the fact that data on industrial production have already been released, which only recently showed an increase of 1.2%, and now it is already falling by as much as 3.3%. And the final inflation data, which will be published on Friday, should only confirm the fact of its reduction from 1.9% to 1.6%. So how not to twist, but the single European currency will most likely have to go down to 1.1400.


But almost certainly all the world's attention will be riveted to the UK, where a vote on the "divorce" agreement with the European Union will take place on Tuesday. Naturally, it is not much different from the one that quite recently almost provoked a vote on the issue of confidence in the Prime Minister. More precisely, in general, is no different. That is, in it as there was, so there is no economic part. And this is natural since there was simply no time to agree on the inclusion of this issue in the text of the agreement. Moreover, the Europeans themselves do not really need this, and not only because Europe has already adopted the current version of the agreement. After all, the absence of the economic part is just beneficial to many European countries, which thereby intend to oust British companies from their national markets. The matter has reached the point that Theresa May no longer excludes the inclusion of reverse gear. This means that there is a possibility that the UK will remain in the European Union. Of course, the political consequences of such a step are as difficult to predict as the results of tomorrow's voting in parliament. But it is obvious that you will not be bored. However, one should not forget about the macroeconomic dynamics, the general tone of which almost always coincides with the moods caused by the actions of politicians. Thus, inflation should slow down from 2.3% to 2.2%, which will be aggravated by a slowdown in retail sales growth from 3.6% to 3.5%. I would also draw attention to the rather rapid growth of the pound in recent days. After such a collapse almost certainly occurs, and most likely it will have to fall to 1.2700.


As noted earlier, the ruble will depend on developments around the Nord Stream - 2. If no specifics follow, then the ruble will follow the general logic of developments in the foreign exchange market, which so far implies a strengthening of the dollar. Specificity implies exactly what punitive measures Washington can take in respect of European companies that have disobeyed its will. Moreover, even if the United States clarifies this issue, the effect will be clearly negative, since all of Washington's actions are aimed at making Russia as "toxic" as possible for European business. Only a complete refusal of the United States from such actions is able to please market participants. But it is simply impossible. So the dollar is quite realistic to grow to 67.75 rubles.


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