Weekly review of the foreign exchange market for January 28, 2019

Brexit is some kind of alpha and omega of our day. Virtually all news releases begin and end with news about the difficult and thorny path of the UK from the European hostel. And this time, the main topic for discussion was the "alternate plan" for secession from the European Union, which Theresa May quickly provided to Parliament. In quotes, for the very reason that it was immediately clear to everyone that she made this plan on her knee over the weekend. After all, before this, there was no talk of any backup plan. And it seems that the reading of this document impressed the parliamentarians so much that instead of the traditional accusations of armlessness they decided to discuss the possibility of a legislative ban on leaving the European family, without a divorce agreement regulating trade issues. And as if by request, while no one had time to ask a trivial question about what smacks of elementary blackmail, the Minister of Commerce of Great Britain said that as soon as possible the United Kingdom would sign trade agreements with each of the countries of the continent separately. They say the negotiations are in full swing, without interruptions for sleep and lunch. True, the honorable gentleman did not bother to enlighten the public about the content of these agreements, especially in terms of trade duties and quotas. But such verbal intervention was enough for the pound to perk up.


But Mario Draghi did not want the single European currency to grow and did his best so that events would develop in a somewhat different direction. During his press conference, which took place immediately after the first meeting of the European Central Bank's board this year, which resulted in the parameters of monetary policy remained unchanged, he said so much that anyone had a brain to curtail. At first, he withdrew all the questions regarding the refinancing rate, saying that one should not wait for it to increase until the end of summer. But then he again raised questions about this very interest rate, saying that the traders had quite correctly guessed the actions of the ECB and had already fixed the refinancing rate in the quotes no earlier than the beginning of next year. As a result, Humpty Dumpty does not succeed in collecting, for it is not at all clear when this thrice-damn rate will be raised. Although it was possible to predict such a development in advance, since inflation in Europe is slowing down again, and this does not particularly contribute to an increase in the refinancing rate. Of course, one may say that inflation may rise by this time and so on, but after all, it has grown before, but almost immediately went down. And no one will guarantee that after her next ascent she will not repeat the same somersault.


And, as usual, behind all political scandals and intrigues, as well as the incomprehensible behavior of the monetary authorities, macroeconomic statistics remained almost unheeded. True, last week there was not much to look at. Well fell 6.4% of home sales in the secondary market of the United States. But then, preliminary data on business activity indices turned out to be significantly better than forecasts. And if the business activity index in the services sector fell from 54.4 to 54.2, while the forecast was 54.1, then the production index rose from 53.8 to 54.9, although they waited for the decline to 53.5. It is easy to guess that thanks to this the composite index of business activity rose from 54.4 to 54.5. And the number of applications for unemployment benefits did not increase by 6 thousand but decreased by 27 thousand. But in Europe, preliminary data on business activity indices instead of growth showed a decrease. In particular, the business activity index in the service sector decreased from 51.2 to 50.8, while the production index from 51.4 to 50.5. As a result, the composite index decreased from 51.1 to 50.7. So without Mario Draghi, it is clear that the single European currency would have to decline. In the UK, however, we were pleasantly pleased with the data on the labor market, which showed a decrease in the unemployment rate from 4.1% to 4.0%, and an acceleration in the growth rate of the average wage from 3.3% to 3.4%. True, to the delight of investors, this increased wages with allowances, while without them they remained unchanged.

In the middle of this week, the results of the first meeting of the Federal Commission on Open Market Operations, which may present many surprises, will be announced. The fact is that although the Fed announced in December that this year the refinancing rate will be raised twice, judging by futures on the interest rate, few people even believe in one increase. In other words, there is no clarity either with the timing of increases nor with the economic conditions that must be met in order to raise the refinancing rate. So if the Fed gives at least some specifics, then nothing will stop the dollar from further growth, as it turns out that two increases in the refinancing rate have not yet been fully incorporated into the value of the dollar. But do not forget that the report ends the week the US Department of Labor, and now he can have a negative impact on the dollar. The fact is that with absolute stability of absolutely all indicators, the rate of creation of new jobs can slow down very much, and this will frighten market participants.


In fact, Europe will have to become a weak-witted observer of the events that await us in the United States. At the same time, the single European currency should rely on the fact that the Fed will disappoint market participants and not give concrete answers to quite specific questions since preliminary GDP data should show a slowdown in economic growth from 1.6% to 1.2%. And against the background of such weak data, even if the Federal Commission on operations in the open market does not dispel investors' doubts, there is practically no reason for the euro to grow. So the probability is extremely high that by the end of the week the single European currency will drop to 1.1350.


But the most highlighted event of the week will be the voting in the British Parliament on the new plan of Theresa May, which parliamentarians will probably already study far and wide. The strange initiative of a number of parliamentarians is alarming to try to legally ban Brexit without a deal, as well as the reaction of the Minister of Commerce, who swears that he has already agreed on everything. Such preparation makes sense only if the new plan of the Prime Minister again contains nothing about trade and duties. In this case, the statements of the Minister of Commerce serve as a supplement to the plan proposed by Parliament. In fact, nothing else is expected in the United Kingdom. And if you look at the incredible growth of the pound, as well as the single European currency, everything is very similar to the preparation for massive sales just after the vote. It is worth waiting for the decline of the pound to 1.3075.


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