Why did the pound start to decline and what will happen to the dollar index?
The British pound began to decline yesterday against the backdrop of Barnier's statement that no progress has been achieved in the Brexit negotiations. The situation is such that in the near future, one should not expect a drastic change in the situation, but there remains hope. Barnier noted that the government, in the event of another failure in the negotiations, is preparing a ‘Plan B’, and with it, other reserve plans. The chances that British Prime Minister Therese May will conclude an agreement with the EU before the end of the year are therefore relatively high. It is highly likely that this agreement will be intermediate, but for GBP’s growth, this event will be quite enough. With such a development of the situation, the Bank of England is likely to continue the direction of tightening its monetary policy.
The consumer price index (CPI) is one of the key indicators that underlies the decision-making on the basic interest rate of the Fed. Together with it comes the index of changes in the volume of retail trade. This indicator is no less important for assessing the economic outlook of the United States - the US economy is basically orientated on domestic consumption, and a huge positive factor of this indicator is that it is calculated and published fairly quickly, which allows the market participants to forecast for the future period.
With each new portion of the statistics received, it is increasingly clear that the Fed is taking a course to strengthen the dollar. Statements by the speakers of the Fed are preparing market participants for the fact that the interest rate will be increased at the meeting of the Committee, which will be held on December 12-13.
At the moment, the US has reached record low unemployment in recent years, which is just over 4%. The Fed seems disappointed in inflation levels, which tend to lag behind their targets, however, this should not prevent the Fed to raise the interest rate.
Since October, the Fed will start to extinguish mortgage bonds by 4 billion and treasury bonds by $ 6 billion, thereby reducing its balance, which currently stands at $ 4.5 trillion.
This will mean that the Fed is embarking on a tightening of its monetary policy.
However, one should not wait for the rapid strengthening of the dollar index. In the US, big problems that will counterbalance the sharp strengthening of the dollar index are the lack of a clear economic policy by Donald Trump and the on-going tax reform.
Most likely, a soft strengthening of the dollar will become the most likely scenario. We wish you profitable trading!
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