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On Wednesday, on the eve of the Fed meeting on monetary policy, which will begin on December 19, there is no unambiguous dynamics in the foreign exchange market. The dollar is trading against major currencies, in general, with a decrease.
The main reason for this dynamic is another appeal from US President D. Trump to the Fed and personally to J. Powell, the head of the regulator, not to raise interest rates. Recall that earlier this year such calls have already led to a local depreciation of the US currency, but the Fed has ignored them, citing their actions by the fact that this should be done against the background of strong economic growth, positive inflation and a good state of the labor market.
Trump, in turn, said on social networks on Monday that "it is inconceivable that in conditions of a very strong dollar and virtually no inflation, while the whole world is torn to pieces around us, Paris is burning, China is slowing, the Fed may even consider the issue about one more rate increase. " In the wake of this appeal, the quotes for futures at federal funds rates went down. If on Monday they indicated almost 75% of the likelihood of a rate hike at the upcoming meeting, then today this probability is measured at 68%.
By and large, the statement of the head of state does not even play a big role here. Earlier, Powell and the Fed ignored his words and continued the planned process of raising the cost of borrowing. But at the moment, the situation is changing. Recent economic statistics clearly indicate that the growth of the American economy is slowing, which is also noted in the dynamics of inflation. And here, the reasons for a pause in raising interest rates do appear. But again, it should be noted that any central bank, as a rule, does not act reactively in a similar situation, for it the dynamics of the processes taking place is important, and for the time being, they only indicate a slowdown in both economic growth and inflationary pressure. A number of other indicators, for example, the situation in the labor market still points to the process of increasing the number of new jobs, and this, in turn, is a serious reason for the growth in demand and inflation.
Considering the current state of affairs, we believe that the Fed will raise its key interest rate by 0.25%, to 2.50%, but its forecasts for economic growth, inflation, and the labor market situation may change next year, which can already become the basis while confirming the current negative dynamics at the beginning of the new year for a pause in the increase in interest rates in March.
Forecast of the day:
The USD / JPY currency pair is trading with a decline in the wake of falling demand for risky assets, as well as a marked reduction in expectations that the Fed will actively raise interest rates in the new year. The price fell below the level of 112.75 and has the prospect of a local fall to 112.25, and then, possibly, to 111.65.
The USD / CHF currency pair is above the level of 0.9915. In the wake of investors leaving risk and demand for protective assets, the pair may fall to 0.9865 after overcoming the level of 0.9915.
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