On Monday, markets traded mainly in the green zone, considering again the positive results of the EU summit and the Brexit compromise. On Tuesday, positive will also prevail but it is unlikely to be protracted. Escape from risk is gradually becoming the dominant idea in the markets since the threat of a slowdown in the global economy, including the threat of recession in the United States, has fundamental grounds.
There is a direct link between the size of the monetary base and the dollar index where more money, the weaker the dollar. At the end of 2016, the reduction in the monetary base which was largely technical in nature led to a sharp strengthening of the dollar and slight panic on the stock exchanges but then the money supply decreased and the dollar weakened against the euro to 1.25.
Now, the situation is completely different. The Fed reduces the balance which means that the monetary base will automatically decline and in turn will lead to strong demand for the dollar. The EUR/USD pair should objectively go down and it would be logical if it were not for two circumstances.
Firstly, inflation is going down, which indicates a drop in consumer demand. This factor manifests itself much stronger than expected, which is impossible to ignore. The Fed simply dissolve arguments for further rate increases. Secondly, Trump's tax reform did not produce the expected effect. There was no repatriation of capital either, while foreign investors are leaving the government bond market and the stock market. The trade balance is still terrible and the budget deficit is growing faster than planned. Moreover, the US economy just can not stand a strong dollar having all the chances to slide into recession in a year.
The way out would be the further development of reforms and the creation of extremely favorable conditions for investors, which would contribute to the revival in the real sector. However, after the elections to the Congress, the Republicans lost control of one of the chambers and now, the chances of developing reforms are vanishingly small.
Thus, the Fed faces a dilemma that is unclear how to solve. Most likely, the December meeting will have to admit that the pause in the rate hike cycle may come earlier than planned. These factors are already being recognized by the market and the dollar is likely to be preparing for a bearish reversal.
Eurozone
The business climate in Germany is deteriorating according to the results of research in November, which is fully consistent with similar studies by Markit and the European Commission. All subindexes have declined with a slowdown in production, the services sector, trade, a strong minus in the construction sector.
The euro looks weak in the short term because the growth in demand for defensive assets is objectively in favor of the dollar but the euro looks weak in the long term. The ECB is trying with all to smooth out the negative effect of the completion of the asset repurchase program but rather awkwardly. Yesterday's speeches by four members of the ECB led by Draghi went like a blueprint and all four refused to discuss economic growth forecasts in their speeches.
On Friday, the preliminary data on inflation in the Eurozone for November will be published. There are no other important releases during the week and markets will be focused on the expectations of the G20 summit. The EUR/USD pair is under pressure and the descending channel is steady. Meanwhile, the bears will strive to test the recent minimum of 1.1214 and the chances of breaking this support are high.
Great Britain
News from the UK is currently turning into pure arithmetic. The only strong driver that can influence the pound is to count the supporters and opponents of the signed agreement in parliament. Ninety-five conservative deputies said they would vote against the deal, and May's position was deteriorating. The public debates will start on December 4 while voting will take place on December 11, respectively. Any statements from parliamentarians will move the pound in one direction or another.
Technically, the pound is still in the side channel and support levels are 1.2693 and 1.2660 but the bears are activated and the test of supports is almost a foregone conclusion. If they do not stand, the price will continue to move down, but the marked fall will only be possible if it is clear that the agreement on Brexit in parliament will be blocked.
The material has been provided by InstaForex Company - www.instaforex.com