18.09.201911:40 Forex Analysis & Reviews: Review of EUR / USD and GBP / USD pairs on 09/18/2019: We will see

Looking at what is happening, obviously, you do not have to be bored. Yesterday, data on industrial production in the United States just came out as the cost of portraits of the dead presidents went down. Formally, everything is true, considering the growth rate of industrial production slowed down from 0.5% to 0.4%. However, they expected a slowdown to 0.2% but a cute fluffy animal always sneaks up unnoticed. It's just that market participants were a little stunned by the fact that the Federal Reserve System entered the repo market for the first time since 2008. At the same time, they were not empty-handed and immediately handed out to poor traders. Somehow, they made ends meet that is already 53.2 billion dollars. Moreover, he promised to return on Wednesday with another 75.0 billion dollars. The reason for such unprecedented generosity lies in the fact that on Monday, repo rates on the interbank market in the United States jumped from 2.5% to 10.0%. This is possible only if there is no money on the market. In this case, we are talking about short-term liquidity, which mysteriously disappeared somewhere. With the help of titanic efforts, the Federal Reserve System was able to reduce repo rates to 4.0%, and the fact that this was not enough was the reason for announcing the continuation of the banquet. Simply put, the Federal Reserve is again putting out the fire with money. And of course, simply the unprecedented generosity in the form of 128.3 billion dollars for two days was the reason for the weakening of the dollar. After all, this is a factor in monetary policy easing. .

In this whole story, what's interesting is not the Federal Reserve System forced to almost throwing money from a helicopter, but that it all happened exactly before the meeting of the Federal Committee for Open Market Operations. From every iron, they tirelessly shout that the Federal Reserve will lower the refinancing rate from 2.25% to 2.00%. At first glance, many believe that the situation with repo rates is yet another proof that there is no other way out. Hence, you need to lower the refinancing rate, which will lower the cost of borrowing, and everything will be fine at once with liquidity. In other words, lowering the refinancing rate is not the solution and in principle, the direct injections of money from the regulator are more like fixing holes.

You need to understand in addition to Donald Trump, most of the need to reduce the refinancing rates are voiced by speculators who trade on their money and borrowed. For them, a decrease in the refinancing rate automatically entails an increase in their profits due to a decrease in the cost of borrowing. However, putting ourselves in the place of all these silent and faceless lenders, who are the suppliers of liquidity in the market. For them, lowering the refinancing rate would mean a decline in their own profits. I dare to suggest that what has happened over the past couple of days is nothing more than a kind of flashmob designed to show the Fed that they are dissatisfied with the possibility of lowering the refinancing rate from the very same liquidity providers. Ironically, this is indicated by the fact that, as soon as the repo rate jumped to 10.0%. The target level for federal funds rose from 2.00% to 2.25%. Indeed, if the market is experiencing an explosive jump in rates, both up and down, then the refinancing rate must be raised in order to cool the market. Moreover, the fact that the Federal Reserve System perfectly understood such a signal is indicated by the statements of a number of representatives of the regulator that they are not talking about a systemic problem, which led to panic in the market.

Federal Reserve Refinancing Rate:

By and large, it is also worth noting that macroeconomic statistics in the United States also provide no reason to lower the refinancing rate. Yes, inflation fell from 1.8% to 1.7%. However, this happened just the other day, making it too early to say that this is a steady trend. Moreover, this was offset by retail sales data, the growth rate of which accelerated from 3.6% to 4.1%. In general, the state of the labor market can be described as one of the best in history, and the pace of creating new jobs exceeds the growth rate of the workforce. On the contrary, it is necessary to increase the refinancing rate in order to prevent overheating in this situation. Of course, Donald Trump is now blatantly pointing his finger at an industry that is experiencing incredibly low growth rates, and that will begin to decline. But all questions regarding industry are removed by simply looking at inventories that have been growing without stopping for almost two years in a row. It smells more like a crisis of overproduction, which is not solved by lowering interest rates. Finally, Jerome Powell, himself, said earlier that this year only one reduction in the refinancing rate is planned. So the question is extremely interesting: will the Fed respond to financial markets, which like drug addicts, are struggling with no dose of low-interest rates, or will it be decided on the basis of economic realities?

Of course, the focus is on the meeting of the Federal Committee on Open Market Operations. But before the announcement of its results in Europe, the final data on inflation are published, which should confirm its stabilization at around 1.0%. To some extent, this will confirm the assumption that the European Central Bank will continue to mitigate monetary policy. However, today, few people will pay attention to this. It all depends on the decision of the Federal Open Market Committee. If the aspirations of speculators come true and the refinancing rate is reduced from 2.25% to 2.00%, then the single European currency will continue to grow in the direction of 1.1100 and higher. If the Federal Reserve System makes an informed decision and leaves it as it is, then it is worth waiting for a decline to 1.1000 and further.

The situation with the pound is even more interesting since inflation data has already been released and showed a decrease from 2.1% to 1.7%, which has already led to a decrease in the pound. However, it is likely that the Federal Reserve will save the pound if it lowers the refinancing rate. In this case, it will quickly return to the value of 1.2525. But if Jerome Powell decides to leave the pound to its own devices, it is worth waiting for it to decline to at least 1.2375.