The dollar strengthened noticeably at the opening of trading on Monday, playing at once several positive signals formed last week. One of them is the positive tone of the accompanying statement to the Fed meeting on November 8, from which the regulator's intention clearly is to raise the rate at the meeting on December 18-19. Additionally, the dollar is supported by problems in the EU, which led to the fall of the pound and the euro.
On November 15, the next write-off of the Fed's balance within SOMA is expected, the balance will lose 17.4 billion, and, as practice shows, usually on the day of the write-off, the dollar strengthens across the entire spectrum of the market, especially against commodity currencies.
At the same time, due to a number of factors, there are concerns that the current strengthening may be the last for the dollar, after which a reversal will occur. The reasons for this scenario are that the Democrats managed to take control of the House of Representatives, which makes it virtually impossible to further develop the reforms. Democrats may agree with Trump's new initiatives, but in return, they will set demands that Republicans may find unfeasible, questions about immigration, health care, or a government debt ceiling.
Until March 1, 2019, the Treasury cannot issue new obligations, but at the end of the year, it will have an account with the Fed in the amount of approximately $ 410 billion. Until March 1, this balance is likely to decrease by no less than 200 billion, which will mean cash flow money in the banking system.
This is one of the main long-term factors that can lead to an increase in the dollar supply even against the background of the Fed's balance reduction and a decrease in its quotations. The upcoming debates in the Congress on the budget and the national debt ceiling will contribute to the reversal of the dollar index in the coming months.
On Monday in the US is a day off, the banks are closed, so the overall dynamics will be determined primarily by news from the EU, which is quite a lot on Monday morning.
Eurozone
The Italian crisis is gradually gaining momentum. The European Commission has published its own forecast of the development of the budget crisis, according to which the Italian budget deficit in 2019 will be 2.9%, and in 2010 it will increase to 3.1%, which exceeds the maximum permissible level for the eurozone countries.
Until November 13, the Italian government should present a new draft budget, the chances that the requirements of European regulators will be taken into account are extremely small. The consequences could lead to sanctions against Italy and an increase in centrifugal sentiment in Europe. The crisis is putting pressure on the euro since a decision on Italy must be made this week.
The currency pair EUR / USD goes below the support level of 1.13, which led to a technically strong signal to increase sales. In the coming hours, testing 1.1250 is likely, a possible return to 1.13 will be used to increase the pressure of bears, there is practically no reason to return above this level.
Great Britain
The European Union rejected Thereza May's proposal to create a mechanism capable of helping overcome differences on the border with Northern Ireland and resolve the issue of customs disputes. The announcement of the failure of the initiative contributed to a sharp decline in GBP / USD on Monday morning, because it casts doubt on an assessment made earlier by May about reaching 95% of the agreements in the negotiations.
This week for May may be the last, when it is still possible to save the negotiations and make a deal on Brexit. In the case of failure, May risks losing her post, and the pound will continue to decline, as big business will increase the pace of exodus from British jurisdiction.
Good macroeconomic data can keep the pound falling, the next publication will take place on Wednesday, investors are waiting for a positive report on the state of the labor market.
Prior to Wednesday, GBP / USD is quite capable of testing the support of 1.2745 for strength and moving down to 1.2695, since the failure in the negotiations on Brexit can erase any positive. The situation for the bulls is complicated by the growth of positive expectations for the dollar, which support it across the entire spectrum of the market.
The material has been provided by InstaForex Company - www.instaforex.com