It seems that before the December meeting of the Federal Commission for Open Market Operations, the market will react only to politics, virtually ignoring macroeconomic data. Over the past week, the dollar only gave up a little position because of two events that were political in nature. First, representatives of the ECB said that they still do not exclude the possibility of raising the refinancing rate despite the quantitative easing program with the warning that inflation should grow to 2.0%. In addition, the US Senate somewhat shattered the dollar's position immediately after Congress passed the bill on tax reform that is supported by Donald Trump. The reform implies a significant reduction in taxes especially for the corporate industry. However, the Senate postponed the consideration of the law and a number of senators released statements saying that they have their own reform project. As a result, the law may be completely different than what Donald Trump promised in the course of the pre-election race. Most importantly, the debate over the tax reform only adds uncertainty which scares the market the most.
However, macroeconomic statistics in the US was far from ideal. Even though growth rates of producer prices accelerated from 2.6% to 2.8%, inflation slowed from 2.2% to 2.0%. Despite this, inflation continues to remain at a sufficient level indicating that the Fed could raise the refinancing rate. The growth rate of retail sales slowed from 4.8% to 4.6% which, combined with a slowdown in inflation, is quite unpleasant. Nevertheless, we expected a slowdown to 3.0%, so the data came out pretty good despite the growth rates of industrial production accelerating from 2.1% to 2.9%. Apparently, it is rather difficult to draw unambiguous conclusions. As a result, the slowdown of inflation does not look catastrophic with producer prices are rising. Consequently, this means that the slowdown in inflation may be temporary.
In Europe, the preliminary data on GDP for the third quarter showed that the EU maintains economic growth at 2.5% which is quite good. Inflation also remains unchanged. At the same time, the growth rate of industrial production slowed from 3.9% to 3.3%. However, as already mentioned, statements that the ECB can raise the refinancing rate despite news from the printing press, allowed the euro to ignore the ambiguous statistics.
The pound grew significantly weaker than the euro with the Bank of England representatives not making any big statements and macroeconomic statistics not being encouraging. The inflation remained at the level of 3.0% while unemployment is at 4.3%. However, retail sales, which had previously grown by 1.3%, began to fall by 0.3%. This is in annual terms. It can be seen that high inflation does not just restrain consumer activity, it also reduces it. It turns out that the fears of those who pointed to the risks of the Bank of England losing control over the situation are beginning to be justified. With inflation above 2.0% and even with its further growth, keeping the rate at 0.25% is a risky business. Even more so, ts increase to 0.5% will not fix the situation.
The week started with the influence of political factors, which will continue to affect the market. On the night of Sunday until the morning of Monday, it became known that the negotiations on the formation of the ruling coalition in Germany failed. With the negotiation process came FDP, and the CDU / CSU, along with the "Greens" not gaining the majority. Angela Merkel now has only two options. She can either form a minority government or go to early elections. Both options are bad, since the minority government will experience enormous difficulties in enacting laws and implementing its plans while early elections will only add uncertainty.
However, not everything plays against the euro. The US Senate said that it will begin consideration of the bill on tax reform after Thanksgiving, which falls on a Thursday. So on Friday, there will be information about how the process is going on in the Senate and what the senators are proposing. Given the serious skepticism of some senators, it can be assumed that disputes will be hot and nothing will be accepted or at least not in the near future. This will render a disservice to the dollar. However, all this can happen not earlier than Friday. Before that, the minutes of the meeting of the Federal Commission for Open Market Operations will be published. Almost certainly, there will be indications that the Fed will raise the refinancing rate in December. This will give the dollar additional forces. In addition, the US expects an increase in orders for durable goods, which is also an additional advantage.
It is only in the UK where serious macroeconomic data will come out. We are talking about the preliminary data on GDP for the third quarter, which are expected to show the economic growth rate remaining at the level of 1.5%.
Apparently, the dollar will first rise in price and the chance for its weakening will only come on Friday.
The EUR/USD pair will decline to 1.1575.
The GBP/USD pair has all chances to fall to 1.3025.
