12.12.201910:07 Forex Analysis & Reviews: Election Day (EUR/USD and GBP/USD review on 12/12/2019)

Jerome Powell, with the grace of an elephant in a China shop, managed to bring down the dollar, although nothing predicted trouble. After all, the Federal Committee for Open Market Operations left the parameters of its monetary policy unchanged as expected. Moreover, the decision was unanimous, and from the following comments, it follows that all members of the Federal Reserve Board do not expect any changes in interest rates throughout the next year. In addition, even the usual wording about uncertainties and global risks disappeared from the text of the press release, which rather suggests the possibility of raising the refinancing rate. However, it was worth Jerome Powell to declare that, if necessary, the Federal Reserve System will expand the asset repurchase program by including short-term government debt securities, as the dollar immediately began to lose its position, allowing the single European currency to reach a local maximum. After all, Jerome Powell's words mean that instead of lowering interest rates, the Federal Reserve will stimulate the economy through a direct infusion of funds. And given that this method is extremely rude and fraught with many negative consequences, it is not surprising that investors were extremely skeptical of the words of the head of the Federal Reserve System.

At the same time, Jerome Powell's words look somewhat inappropriate, as inflation in the United States increased from 1.8% to 2.1%, although even the most daring forecasts indicated an increase to 2.0%. That is, inflation confidently returned to the previously designated target level, although there are risks of its reduction. However, we are only talking about a slight decrease. Moreover, it is also strange that Jerome Powell did not note this fact during his press conference, although inflation data became known several hours before the end of the meeting of the Federal Committee for Open Market Operations. Although inflation is more likely to suggest that the Federal Reserve is really worth considering the possibility of raising the refinancing rate. Therefore, Jerome Powell's statements really look amazing and there's nothing strange in the fact that the dollar began to lose its position, since investors do not belong to the category of people who enjoy uncertain risks.

Inflation (United States):

Yesterday, the pound could not develop success, although it initially ran up after the single European currency. The reason for this behavior is in today's early parliamentary elections in the UK, and investors simply do not want to run ahead of the engine. Moreover, the voting results can present an unpleasant surprise. Of course, no one doubts that the conservatives will gain the most votes, but is this enough for Boris Johnson's victory? Will the conservatives have enough seats in the House of Commons to make the necessary decisions, or will they have to take into account the position of the Labor Party on every issue? In many respects, how many votes Jeremy Corbyn will gain depends not only how the pound behaves today, but even Brexit's fate. To simply put it, Boris Johnson's confident victory means that events will develop according to the previously outlined action plan and no unforeseen surprises are expected. Therefore, investors can sleep peacefully, knowing that it will be just bad in the future. However, if Jeremy Corbyn will be able to get enough seats in the House of Commons in order to prevent the conservatives by doing something, then various options are possible, including tightening of Brexit, as well as other obscure tricks. For investors, this means growing uncertainty and a complete lack of understanding of what will happen next. That is, it may turn out that everything will be completely bad instead of just being bad. Of course, there is an option that it will even be nice, but it is always easier for investors to proceed from the worst-case scenario so that future losses are not an unpleasant surprise. Everything will show the results of the vote but the evening, we will only know preliminary results. Thus, the market will stand still waiting for the verdict until this moment.

At the same time, today's early parliamentary elections in the UK overshadowed all other events, of which there are also enough. After all, the board of directors of the European Central Bank will also meet today. The first one is led by Christine Lagarde. Although it is obvious that there will be no changes in the monetary policy of the European Central Bank, the market would not have reacted to this event in any way. In addition, Europe publishes data on industrial production. The decline of which should accelerate from -1.7% to -2.4%, which does not add optimism to the single European currency. Moreover, this will mean that European industry has been declining for twelve consecutive months. In addition, the final data on inflation in Germany and France have already been released. The largest euro area economy reported that inflation remained unchanged, 1.1%. The second economy of the euro area, that is, France, joyfully reported an increase in inflation from 0.8% to 1.0%.

Industrial Production (Europe):

For the United States, forecasts are much more fun. Thus, the growth rate of producer prices should accelerate from 1.1% to 1.2%. So to speak, not only just supporting inflation growth, but also questioning the reasonableness of the words spoken yesterday by Jerome Powell once again. In addition, the total number of applications for unemployment benefits may be reduced by 5 thousand. Meanwhile, if the number of initial applications for unemployment benefits should increase by 10 thousand, then the number of repeated applications, on the contrary, will decrease by 15 thousand. In turn, unemployment benefits are much higher, since it speaks of the duration of unemployment and directly affects the level of unemployment.

Producer Price Index (United States):

The single European currency is incredibly overbought, and the rebound suggests itself. Thus, it is likely that the euro will react to macroeconomic statistics today unlike the pound, which clearly does not favor its growth. In other words, we should expect a gradual decline in the single European currency to 1.1125 during the day. After that, everything will depend on the results of the early parliamentary elections in the UK, to which the euro will not react as sharply as the pound. In the case of a successful outcome for Boris Johnson, we expect growth to 1.1175. Otherwise, the single European currency may decline below 1.1100.

The pound is overbought even more than the single European currency. But today, no one will look at it due to the fact that all attention is only focused to polling stations. If Boris Johnson can get a sufficient number of votes, the level of 1.3250 looks only the beginning of a further increase. However, do not write off the latest sociological polls that show that Jeremy Corbyn will get enough votes to make the conservatives a fun and interesting life, since this is a negative scenario for the pound, and in this case, it will move to around 1.3050.