13.12.201700:29 Forex Analysis & Reviews: Dollar in anticipation of the "super-environment"

The American currency has come to a unique point: tomorrow will determine the overall prospects for next year, setting the pace of movement not only for the euro-dollar pair, but for all dollar pairs.

As a "warm-up" before the main event of the environment, we learn the data on American inflation. This release will be published a few hours before the announcement of the results of the December meeting of the Fed, which gives it a special poignancy. It should be noted that in October, the consumer price index fell to the lowest level since July this year - 0.1% in monthly terms. In annual terms, the indicator also slowed its growth, standing at the level of 2%.

Today, the general consensus forecast looks quite optimistic: + 0.4% month on month and + 2.2% year on year. If these expectations are confirmed, the dollar will receive support, as inflation is almost the only "weak link" in a series of positive macroeconomic statistics. Nevertheless, the weakness of this indicator plays the role of a fly in the ointment as it affects the position of the Fed members.

By the way, in recent years the resoluteness of the regulator's members has significantly decreased, judging by their public speeches. In particular, recently, the head of the Chicago Fed, Charles Evans asked the question - is it necessary to hurry with the tightening of monetary policy, if one can wait about six months, keeping track of inflationary dynamics? A similar opinion is shared by Neel Kashkari, who, however, always defended the "dovish" position.

But hearing such comments from Lael Brainard was very surprising. True, she urged in September not to rush to raise rates, but since then the situation with inflation has not changed for the better. Her colleague, Patrick Harker, also voiced his "growing suspicion" regarding inflationary growth. Other members of the Fed who voted this year (for example, Robert Kaplan) spoke in favor of a rate hike in December, but kept silent about further prospects.

In other words, Fed officials do not risk giving certain forecasts for 2018. More and more often we can hear either doubts or blurry phrases about the next steps of the regulator. The views of Janet Yellen and William Dudley, who will leave their posts early next year, should not be taken into account. Also dismiss the positions of those who do not have the right to vote next year. After such an articulation, a natural question arises: will there be enough "hawks" in the camp of the Fed to convince traders of the determination of their intentions?

The Fed has one indisputable trump card - the US labor market. Unemployment, which is at a record low, does not cease to decline - and in the future should have a beneficial effect on the inflation rate. But the extremely weak growth of the average wage has caused much confusion. In October, the indicator dropped into the negative area, slightly increased in November (+ 0.2%), and the peak growth this year was + 0.5% on a monthly basis. The basic price index for personal consumption showed stagnation, reaching 0.2%, after a weak growth in the previous months.

All this suggests that a strong labor market is not able to ensure inflation growth: during 2017, the unemployment rate in the US almost fell monthly, moving from 4.8% to the current 4.1%. In its turn, the consumer price index did not show a proportional dynamics. It is not for nothing that Janet Yellen explained the "mysterious reasons" for the weak inflation - this question is asked by almost all members of the Fed.

Assessing the prospects for tomorrow's meeting, some analysts put into consideration the tax reform. In the context that the regulator will have to "adjust" the pace of tightening monetary policy in view of the planned fiscal stimulus. There is strong disagreement with this position: firstly, the tax reform has not yet been adopted in the final version, and, secondly, the Fed never made a decision "in advance". Moreover, in my opinion, the situation with the tax reform will be considered as a factor of uncertainty due to the lack of a unified position among the Republicans.

In general, the overall fundamental background for the EURUSD pair reminds us of the events of December 2015. The market almost all year round discussed the possibility of easing the parameters of the monetary policy of the ECB. When this forecast was confirmed, the pair unexpectedly went up, having strengthened in three weeks by 500 points. Mario Draghi made it clear that the regulator will limit itself to the measures taken, after which traders began to buy the European currency.

It is likely that tomorrow we will observe a similar situation. The fact of the rate increase will surprise no one, therefore dollar bulls will hope for the resoluteness of the regulator's members regarding the prospects of 2018. If the Fed ignores the weak CPI and focuses on the positive results this year, the dollar will grow stronger throughout the market - in the EURUSD pair at least to 1.1580 (the bottom line of the Bollinger Bands indicator on the weekly chart, which coincides with the Kijun-sen line).

But, in my opinion, the regulator will not be able to ignore the slowdown in inflation, which will affect the general mood of the Fed members over the rate increase trajectory. In this case, the targets of the upward movement are the marks 1.1820 (the upper boundary of the Kumo cloud on D1) and 1.1930 - the upper line of the Bollinger Bands indicator on the same timeframe.