30.07.201901:57 Forex Analysis & Reviews: Dollar is strengthening, despite the prospect of the first Fed rate cut in 10 years

The USD index reached two-month highs amid positive US statistics, as well as due to the weakness of its main competitors.

Last Friday, a moderate positive from GDP for the second quarter added to strong data on the US labor market, retail sales and industrial production.

Despite the fact that in the period under review, economic growth in the country slowed down in annual terms (from 3.1% in January-March to 2.1%), it exceeded the forecasts of analysts who expected a rise of 1.8%. At the same time, consumer spending, which accounts for 70% of US GDP, rose 4.3% yoy in April-June, compared with 1.1% in the first quarter.

In the light of the release of strong statistics on the United States, the chances of reducing the federal funds rate by 50 basis points at the July FOMC meeting decreased to 19%, but a little later they again rose above 21%.

For the first time since 2008, the US central bank is planning to ease monetary policy despite the longest economic expansion since 1854, record low unemployment and record highs of the S&P 500 index.

The two main reasons for the sharp change in the Fed's position, which last year actively used monetary tightening, are sluggish inflation and a slowdown in global GDP growth.

While consumer prices in the United States are not responding either to the expansion of domestic demand under the influence of large-scale fiscal stimulus or to a strong labor market, the Fed's desire to help the global economy contrasts sharply with the "First of all" slogan of the US president.

The greenback is strengthening not only due to the US economy's strength, but also because of the weakness of its main competitors. More than 90% of the global debt market instruments have a yield lower than the federal funds rate. For comparison: in 2015, their share was 50%. If non-US assets lose their attractiveness in the eyes of investors, why not increase the share of dollar-denominated securities in their portfolios?

Meanwhile, the positive statistics for the US "bears" for EUR/USD was not enough to bring quotes beyond the range of 1.11-1.119. Probably, market participants prefer to wait for the results of the July FOMC meeting to be announced.

If the reduction in the federal funds rate by 25 basis points in July is practically beyond doubt, then the Fed's further actions remain a mystery to traders.