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It seems that the long period of growth of shares in the US ends with its collapse. While the effect of panic is not observed, the process of sales will still increase. Once this happens, then the panic definitely will not be avoided.
Against the backdrop of the recent release, as well as the strong data on the US economy on Monday, investors have come to understand that the Fed will continue the cycle of raising interest rates. The likely increase in inflationary pressure on the wave of wage growth, the effects of the tax reform, and a strong labor market in the United States can lead to a continued fall in demand for fairly overbought shares. In this situation, panic can contribute to the growth of demand for protective assets such as US government bonds. We already saw how demand is used on Friday and Monday when the Japanese yen soared against major currencies, including the US dollar and gold.
There are two reasons for the strengthening of the US dollar. On one hand, the sale of shares in the US leads to dollar purchases. On the other hand, the strong data on the US economy caused by yesterday's figures in the business activity index for the non-manufacturing sector or PMI from ISM which rose to 59.9 points last month as compared to December's value of 56.0. This reinforces the understanding by the markets that the process of raising rates from the Fed will continue, which is positive for the dollar.
However, assessing the possible scenario, we believe that if the financial market in the US declines do not panic, and such a risk exists, then the local strengthening of the dollar should be suspended. In our opinion, it will begin closer to March after the publication of updated data on inflation in the US and the March meeting of the Federal Reserve. It will also be interesting for the markets to know the ECB's position on the issue of changing the monetary policy in the euro area this year. The markets believe that the European regulator will decide on this important step, which will support the euro. However, if such coherent evidence does not exist, then the euro will also be under strong pressure.
Forecast of the day:
The EURUSD pair has reached a local minimum in the range of 1.2360-1.2500. If panic intensifies in the markets, then the pair can survive the 1.2360 mark and fall to 1.2285. However, the stabilization of the situation may become the basis for the price reversal and its growth again to 1.2500.
The GBPUSD pair is also under the influence of the same forces as the eurodollar. If it fails to rise above 1.3985, there is a possibility of continuing the decline to 1.3850. However, the growth of positive in the markets can help raise the price to 1.4100-1.4115.
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