Of course, there was a lot of talk that the dollar is strengthening and the like, but if you look at the weekly charts, it appears that the turbulence was fun, but again it all came down to trampling on the spot. Indeed, the dollar looked very good for almost the entire week, but at the very end of it, nearly all of its gains were lost. The most discussed topic of the previous week was Brexit, and in the near future the conversations will not subside, but will only intensify. It all started with the failed summit of the European Union on the agreement with the UK. The fact is that a huge number of statements have been made recently that the parties have reached agreements on the main issues and are almost ready to sign the final version of the agreement from day to day. But even before the summit, Theresa May was literally ridiculed in Parliament during her speech with a report on Brexit. This alone made it clear that there are many in Parliament who will not vote for the agreement proposed by the prime minister. From their point of view, the version of the agreement does not take into account the interests of the UK and contradicts the will of the people expressed in the referendum. The summit demonstrated that no agreements had been reached on fundamental issues. Moreover, Germany, which is the heart of the European Union, has demonstratively begun preparations for the worst-case scenario, implying the UK's exit without any trade agreement with continental Europe. During the weekend, there was a large rally in Britain itself demanding a referendum on the content of the text of an agreement with the European Union. Many parliamentarians do not deny the possibility of holding a second referendum. So there is no unity within the UK itself regarding a trade agreement that will shape relations with Europe after leaving the European Union. It is obvious that Theresa May, who has a minority in the Parliament, is simply not able to negotiate, as her political opponents, who have the majority of votes in the House of Commons, do not intend to sign a soft, in their opinion, version of the agreement. While the hard option does not suit not only Europe, but even Northern Ireland, which is part of the UK. Thus, the probability of a very tough option, implying the absence of any agreement, is becoming increasingly real. And not only does it scare investors, because it creates too much uncertainty, it also turns a repeated referendum into a reality. Such confusion is not good for anyone in Europe. Mark Carney has already openly stated that there is no question of a revision of the monetary policy of the Bank of England before leaving the European Union.
And this is all against the background of extremely weak data, which showed not only a slowdown in inflation from 2.7% to 2.4%, but the growth rate of retail sales also slowed from 3.4% to 3.0%. The only thing that could please the British statistics is the data on the labor market, as with a stable level of unemployment, the growth rate of average wages, both with and without premiums, accelerated. But waiting for their decline. Also encouraged by the growth rate of UK public debt, which increased by 3.3 billion pounds against 4.8 billion pounds in the previous month.
No less fun fared in Europe itself, where the debate about the budget deficit of Italy does not subside. And it seems like Brussels approved the excess of the budget deficit limit, but at the end of the week sent a letter to Rome with a request to explain how Italy intends to reduce the budget deficit. The main thing is that this situation has once again highlighted the problem of public debt in the euro area. The most interesting thing in this whole situation is that the program of quantitative easing of the ECB does not contribute to the solution of debt problems, but many note that its completion will only aggravate this situation. Many people seriously fear that if Mario Draghi keeps his promise and the ECB curtails the quantitative easing program, many European countries will be on the verge of the abyss called default. In Italy, such fears have already led to talk that it is necessary to abandon the single European currency and return to the good old Lira. But if this happens, the single European currency can be thrown into the dustbin of history, so the hopes that the ECB will still complete the quantitative easing program are melting away.
The final data on inflation in Europe was the only one that confirmed growth from 2.0% to 2.1%. But the market has already taken this into account after the publication of preliminary data. And who cares about inflation, when there are problems with public debts.
All this leads us to one question - why has the dollar not strengthened even more?
Part of the answer must be found in the United States of America itself, or rather in its economic dynamics, which also raises quite a few questions. Market participants have not yet recovered from the sharp slowdown in inflation, as it turned out that the growth rate of retail sales slowed from 6.5% to 4.7%. Against this background, inventories rose by another 0.5%, which calls into question the prospects for growth in consumer activity. It is also a matter of concern that with the constant growth of warehouse stocks, the growth rate of industrial production accelerated from 4.9% to 5.1%. It turns into a sort of explosive mixture of lower inflation and retail sales with the growth of industrial production and inventory. In such circumstances, any increase in inflation is a belief in children's fairy tales. Of course, the content of the minutes of the meeting of the Federal Open Market Committee tells us that the Fed has not yet revised its plans for the pace of increase in the refinancing rate. But the meeting itself took place long before the release of weak statistics on inflation and retail sales. However, representatives of the regulator tried to reassure everyone, saying that a single one-time slowdown in inflation is not a cause for concern and the Fed sees no reason to revise its plans. However, the dynamics of stocks and industrial production indicates an extremely high probability, if not further slowing down inflation, then its stabilization at the achieved level, which in itself calls into question the further possibility of raising the refinancing rate. Of course, no one doubts that the refinancing rate will be raised in December, but what will happen next year raises many questions.
What awaits us this week?
To begin with, it is worth looking at the US, whose statistics are now all very concerned about the growing fears about the future plans of the Federal Reserve System. And the forecasts are extremely pessimistic. Thus, the total number of applications for unemployment benefits should increase by 23,000, mostly due to repeated applications, the number of which should increase by 20,000, while the number of primary ones is only by 3,000. This indicates the risks of increasing the duration of unemployment, so it threatens to worsen the situation in the labor market. Equally important, GDP estimates for the third quarter may indicate a significant slowdown in economic growth. Sales of new homes could fall by 0.8% and durable goods orders by 0.9%. So it is not clear how industrial production will grow, and even in the conditions of the endless growth of warehouse stocks. The only thing that can please investors is the preliminary data on the indices of business activity, as the composite index of business activity is expected to grow. But due to the growth of the index of business activity in the service sector, while the production index should decline. However, given that the weight of the service sector is much greater, and its growth provides the increase of the composite index. But in any case, against the background of the rest of the business activity indices look faded. Moreover, the production index will decline, which further indicates the risks of a strong slowdown in the economy.
But in Europe, preliminary data on business activity indices should show a decline on all fronts. More importantly, though, business activity indexes should decrease precisely in Germany and France. However, the growth rate of consumer lending may accelerate from 3.1% to 3.2%. But all this pales before the meeting of the Board of the European Central Bank on monetary policy. Moreover, a day after it, Mario Draghi will hold a press conference. Given the concern of investors about the debt problems of the euro area countries, which has increased due to problems with the Italian budget, the ECB head is looking forward to specifics about the fate of the quantitative easing program. That's just Mario Draghi, taking into account all the concerns, who will clearly be extremely careful and will not give any specific answers. This will have an extremely negative impact on the single European currency, as it will only convince everyone that the ECB will once again extend the quantitative easing program. And the very situation with public debts leaves no other option. Another factor that indicates that inflation in Europe, as well as in the US, may suddenly and sharply slow is that the growth rate of producer prices in Germany is likely to slow from 3.1% to 2.9%. And although the US statistics are expected to be extremely weak, the negative due to the results of the ECB Board meeting might likely lead to a decrease in the single European currency to 1.1450.
No data was released in the UK, but the hysteria over Brexit is enough to ruin the pound's life. It is obvious that the media will continue to develop the topic of the second referendum because of disagreement with the version of the agreement proposed by Theresa May and her political rivals. Unfortunately, the internal British political fuss for power threatens to lead to disaster in the form of the absence of any agreement on trade with the European Union. Germany will take advantage of this situation and impose the introduction of protective duties and quotas for British goods. Given that the UK considers continental Europe as its main trading partner, such a development will cause a huge blow to the economy of the United Kingdom. But a number of European countries will try to solve their internal problems at the expense of Great Britain. Especially related to public debt. So the pound will have to decline, and the benchmark stands at 1.2975.
