The first truly working week of the new year showed a change in the sentiments of participants in the foreign exchange market which, as expected, was not in favor of the US dollar.

The reasons for this phenomenon are firstly, the growth of expectations that the world's largest central banks, including those in the eurozone and Japan, can reconsider their views on monetary policies in the coming year amid the improvement of the economic situation. And the Bank of England, the UK regulator, may, after reaching agreements between the British authorities and the EU representatives, proceed with the cycle of raising interest rates as inflation in the country begins to go towards to 3.10%. This is serious and is unlikely to be ignored. We are confident that clarifying certainty in resolving the Brexit problem will be the reason for the growing demand of the pound sterling which at the moment, is still significantly below its fair value relative to the major currencies, especially to the US dollar.

With regard to the prospects for the continued growth of the euro, we note that they will depend not only on investors' expectations after the publication of the December ECB monetary policy report last week, which revealed the likelihood of stopping the stimulus measures by the bank at the September meeting, but also from the publication of data on economy of the region as well as the settlement of the political process in Catalonia. In addition, the news about a preliminary agreement on the formation of a coalition government in Germany became a positive factor for the euro.

The yen received a strong stimulus to grow against the background of the decision of the Central Bank of Japan to reduce purchases of government bonds by 5%. This is a real important signal. However, it will have to be supported in the future by further decisive measures of propensity to tighten monetary policy. If it does, then we should expect the yen to continue to grow smoothly.

As for the future of the US dollar, we can say that the Fed will try to continue to follow by its plan of increasing the cost of borrowing. However, there is one risk that can be realized. If inflationary pressures in the United States stabilize or in the worst case, decrease, the Fed will find it hard to have reasons for raising rates. This could grow into a pause in their increase, which will lead to the dollar turning down, not only against the euro, sterling, and yen , but even in relation to other major currencies.

Forecast of the day:

The EURUSD pair remains in the medium-term uptrend on the wave of expectations of what the ECB will probably report this fall on the change in the monetary policy this year. This is the main factor supporting the pair. An additional stimulus to its growth is the weakness of the dollar on the wave of unimpressive data on inflation in the United States. Given this, it can be assumed that the pair will continue to rise to 1.2335 if it holds above 1.2200.

The GBPUSD pair has a potential to grow to 1.3900 on the wave of three reasons. The first is the expectation of positive Brexit news. The second is the probability of further growth in rates from the Bank of England due to inflation. And the third reason is the general weakness of the US dollar.