The dollar still looks weaker than most G10 currencies amid growing optimism about the favorable outcome of the Brexit saga. The risk appetite has increased slightly, and the dollar will remain under pressure in the short term. In addition, the latest macroeconomic data from the US does not look convincing.
The report on retail sales for September turned out to be frankly weak, while industrial production fell 0.4%, for the second time in the last 3 months. In the post-crisis years, there has been an inversion of the relationship between industrial production and the state of the labor market, which indicates structural changes in the American economy. If before 2008, the dynamics of industrial production relative to GDP and the state of the labor market as a whole coincided, then in the last decade, it became clear that the labor market is increasingly less dependent on the state of affairs in the US industry.
Of course, first of all, you need to understand that this is an inevitable consequence of the post-industrial warehouse economy, but this inevitability gives rise to a number of rather unpleasant consequences. The main of which is the complete dependence of the economy on the status of the dollar as a single global currency. On the other hand, the consistent increase in the trade deficit leads to an increase in the budget deficit, which means that the services sector (primarily financial) should extend beyond the limits of the American jurisdiction.
This is precisely the task that any American government solves, no matter what goals are announced publicly. Trump's trade war ultimately boils down not to rising tariffs and not to supporting an American manufacturer, but to prevent the creation of competing financial systems.
As part of the solution to this issue, it is impossible to allow a reduction in lending, so the Fed is forced to increase emissions, calling it "technical expansion." Until the foreign trade goals are achieved, the dollar will not begin a strengthening cycle.
EUR/USD
The ECB begins its preparations for a key meeting on October 24. The split in the board of governors has not been overcome and the markets are preparing to launch a program of buying up assets and lowering rates, but deeper measures, except for those that have already been taken into account by the market, which are unlikely. Inflation in September, on the other hand, is within forecasts. The decline in industrial production slowed down, while the probability of a favorable Brexit supports the euro.
The euro is likely to continue to grow to the level of 1.1162 by the close of the week. But a pullback to the support level of 1.1109 will not mean the formation of the top.
GBP/USD
The negotiations between the UK and the EU on Brexit finally obtained positive results - it was announced that an agreement on the Irish border had been reached, and now, nothing prevents the submission of the presentation of the final plan for the EU summit.
As for the British parliament, which must approve the deal, everything is more complicated - Johnson does not have a majority, and he will need to find some additional arguments to convince skeptics that the solution obtained is the best. There are chances, but not so many - the DUP party did not approve the deal, and without its votes, it is unlikely to get the necessary majority.
In addition, the pound rose on political news, but if the concerns are not addressed, a strong pullback is very likely, as macroeconomic indicators push the Bank of England to decisive action.
The labor market is still strong, average wages are high, but the general price level has lost momentum. Inflation rose in September by 0.1%, which is significantly lower than + 0.4% in August, while producer prices have a pronounced negative trend. In September, they reached + 1.8% against -0.9% a month earlier. This is not surprising, considering the growing pace of slowing production and reducing production.
As a result, the Bank of England will be forced to take some measures in favor of supporting both business activity and falling consumer demand. Against the background of other central banks actively implementing or preparing to implement incentive programs, BoE runs the risk of losing momentum and putting the British economy in a knowingly losing position due to the growth of the pound.
Today, political news will contribute to the growth of the pound. Thus, it is likely to gain a foothold above the level of 1.2875 and re-test the psychological resistance of 1.30. Support is found in the border of the channel - 1.2715, from which the pound went up this week.
