The US dollar continued to strengthen and develop its momentum, which was formed last Friday. According to the markets, the wave of panic that formed excessively strong caused the employment report to decline, there are not so many reasons for accelerating the normalization policy by the Fed.
It should be noted that both the Fed and the US government continue to coordinate policies on global cash management. The Fed reduces the balance as it reduces the global supply while raising the rate leads to a tightening of credit conditions.
The government, proceeding from the fact that the Fed reduces the purchase of treasuries, relies on other sources of financing, particularly on the repatriation of capital and the revival of economic activity through tax reform. Everything goes to the fact that the value of the dollar will rise, as the hedging transactions using the dollar will also rise, which reflects to the latest dynamics of overnight index swap (OIS) in favor of the dollar.
In order to pass between "Scylla" and "Charybdis", the dollar remains nothing either. More difficult conditions will cause its cost and increase the weight of the dollar, but at the same time, it will serve as the basis for continuing the policy of excluding the dollar from international settlements.
To prevent this, a policy is required as the dollar will become "as reliable as gold" again. This can be achieved by compromising the economic support of the competitors' currencies Among the possible measures is the imports restriction of steel in the US from China, Russia and other several countries. This step is currently under consideration by the government, its introduction can seriously undermine the position of the single European currency. The European Union, in any case, reacted as quickly as China regarding the event of imposing protective duties, the response will be rapid and adequate
On the other hand, the dollar should be strong and shall not strengthen against the euro, this will disperse inflation due to the rise in import prices. The American financial authorities will manage to get out of this contradiction until it remains uncertain.
The investors' reaction towards the recent turmoil in the financial markets is rather calm before the publication of the FOMC minutes. On December 1, the markets proceeded from the fact that the rate will be raised in March, with a probability of more than 60% rate hike in June again, and the third raise will take place either in September or in December.
At this point in time, there are no signs of the possibility of four rate increase. According to CME, the probability of an increase in the rate in June is 54.3%, which is less than 3 weeks ago, and the probability for September is reduced from 40.1% to 32.6%, hence, there is no more discussion about the fourfold rate increase.
Hence, it is clear that the January 31 minutes of meeting will not contain the opinion of the markets and any hint of four increases. This also means that the tightening of rates does not increase, so you can return to the previous models.
In the absence of significant macroeconomic reports, the focus will be on the speech of the Fed leadership. There are quite a few planned performances for the second half of the week. Most likely, the members of the Committee will calm markets, as usual, and assure that the policy of "gradual normalization" remains unchanged. The majority of attention will be on the speech of the Federal Reserve Bank of New York head, William Dudley scheduled on Friday night. Dudley is considered the most influential member of the Fed after Fischer's resignation.
The business activity data in February from Markit will be published today, the outlook is positive, while PMI in the service sector is expected to grow which may give the dollar an additional impulse.
Based on the set of indicators, the strengthening of the dollar in the short term appears to be more logical. Gold pulled back again from resistance at 1.370, which indicates a decrease in tension. After a long weekend, stock indices on Tuesday traded in a narrow range which indicates the lack of market driver. Moreover, markets need new benchmarks.
* The presented market analysis is informative and does not constitute a guide to the transaction.
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