The pre-New Year period in the foreign exchange market is characterized by two opposite states either a phlegmatic flat or abnormal volatility. The euro-dollar traders did not go into hibernation and show quite vigorous activity this year. This contributes to the colorful fundamental background, primarily regarding the prospects for the US currency. The dollar index fell from 97.4 points to the current 95.9 for the three weeks of December, reflecting the decline in demand for greenbacks. The yield on 10-year-old treasuries also consolidated below the 3% mark, putting additional pressure on the currency.
The main reasons for the weakening of the dollar can be divided into two components: firstly, this is the position of the Fed, and secondly - the current events of a macroeconomic and political nature. In my opinion, the starting point for a decline in the dollar was the December meeting of the Federal Reserve, where the regulator announced a slowdown in the tightening of monetary policy. Traders have always treated with some doubt the point forecast of the Fed, which, as a rule, reflects the most optimistic scenario. Therefore, when the regulator reduced the approximate number of raises to two, then there immediately appeared on the market that the market should be prepared for only one rate increase in 2019. Some experts voiced a more pessimistic option in which the Fed will take a wait and see position throughout the next year.
Under conditions of such uncertainty, the role of key macroeconomic indicators is growing. Let me remind you that the American regulator lowered its forecasts for GDP growth and inflation, while Jerome Powell added that next year the statistics will be "not so favorable" to the Fed's forecasts, as it was, for example, this year. Therefore, the consumer confidence index published yesterday seriously knocked down the position of the US currency. The release was much worse than expected: for the first time in five months, the indicator dropped below the 130th mark.
The decline in consumer activity is fraught with a slowdown in inflation - and after all, the consumer price index showed weak growth in November. In addition, the index of personal consumption expenditures which is one of the main indicators, which is closely monitored by the Fed also disappointed traders. On a monthly basis, the indicator remained at 0.1%, although experts predicted a minimal increase to 0.2%. Similarly, other indicators in the same way do not make happy dollar bulls as the level of wages is marking time. Nonfarm dropped to 155 thousand and the GDP indicator was revised downwards to 3.4%.
All this suggests that investors' concerns about the lingering pause are very reasonable and although these are only independent speculations of traders, these factors have a strong pressure on the US currency. The political crisis in the US plays only a background role, which incidentally, also complements the overall negative picture. Yesterday, the US Senate did not consider the budget, thereby extending the "shutdown" until January 2 of next year when the legislators will meet in a new composition. Trump is upholding his election promise to build a wall on the border with Mexico and the congressmen, in turn, refuse to allocate a fabulous amount of five billion dollars for this.
The situation is clearly at an impasse and without any compromise solutions. According to the Democrats, they are ready to allocate only 1.3 billion to "other measures to ensure border security," while Trump said he would not sign such a budget. On his Twitter account, he said that the shutter will last "as long as it takes," hinting at further confrontation. The political split is aggravated by the fact that the Democrats in January will gain control over the House of Representatives while the Republicans will take several additional seats in the Senate.
In other words, the hazy outlook for the monetary policy of the Fed and political uncertainty put pressure on the dollar, pushing the EUR/USD pair to the borders of the 15th figure. The European currency does not yet have its own arguments for growth, therefore, the northern price dynamics are due only to American events. However, the European calendar is not completely empty. A preliminary assessment of data on inflation growth in Germany will be published today. The dynamics of German inflation can have a significant impact on the euro, especially since experts predict the contradictory dynamics of this indicator. After a two-month decline on a monthly basis, the consumer price index should rise to 0.3% while it is expected to decline to 1.9% in annual terms. If these indicators come out in the "green" zone, the pair will receive a reason for further growth.
In technical aspect, the pair broke the first resistance level of 1.1440 (the upper line of the Bollinger Bands on the daily chart) and headed for the next barrier that corresponds to the upper boundary of the Kumo cloud on the same timeframe (1.1515 mark). If the price consolidates above this level, the Ichimoku Kinko Hyo indicator will generate a bullish Parade of Lines signal, which will open the way to the area of the 16th figure. Today, these are all prerequisites for the implementation of this scenario.
The material has been provided by InstaForex Company - www.instaforex.com