On Friday, disappointing data on inflation in Germany came out. On a monthly basis, the German consumer price index remained at 0.1% (although experts predicted its growth to 0.3%), and in annual terms fell to 1.7 % is the worst result since April. Germany is the "locomotive" of the European economy; therefore, such a weak dynamic speaks of a similar trend throughout the eurozone. Actually, the latest data of the European CPI already indicate a slowdown in inflation and, apparently, the decline in key inflation indicators will continue in early 2019.
It is worth noting that the euro/dollar pair actually ignored Friday data, although, as a rule, the single currency reacts rather sharply to the dynamics of the German indicators. This suggests that now traders are focused only on US events, and the motion vector of EUR / USD depends on the behavior of the greenback. In turn, events in the United States are characterized by the confrontation of the White House and Congress, the dynamics speak of a serious political split.
The congressmen had the opportunity to make concessions to Trump last Thursday, but they chose to leave this problem to their successors, who were elected in November of this year. In other words, now the question of allocating $ 5 billion to build a wall between Mexico and the United States will be considered in January when the Democrats will gain control of the House of Representatives, but the Republicans will take several additional seats in the Senate. The political split will only get worse, with each side using the available leverage.
So, recently, Trump said that if Congress did not allocate the above amount, he would be forced to "close the southern border." He also threatened to stop financial assistance to Guatemala, Honduras and El Salvador (as they allegedly take a passive stance on the issue of illegal migration). Representatives of the Democratic Party refuse to make any compromise, accusing Trump of politicizing the issue.
As a result, the negotiations are at an impasse, and the shutdown continues. Hundreds of thousands of federal employees are either sent on unpaid leave, or they continue to leave work without receiving a salary. However, traders are not worried about the fact of the shutdown (this year alone, this mode was introduced for the third time). This situation suggests that it will be difficult for American politicians to find a common denominator on key issues, including those of an economic nature.
Let me remind you that after the announcement of the first results of the midterm elections, the dollar essentially lost ground. But later Donald Trump announced that he agreed to work with Democrats on key economic projects, including in the area of infrastructure development. This fact inspired dollar bulls, after which the greenback recovered throughout the market. As we see, the real picture of political relations differs significantly from the intentions voiced in the fall, and this fact will exert background pressure on the dollar. It is worth noting that the momentum of economic growth in the United States is gradually fading (recent data on GDP growth eloquently speaks about it). Firstly, because of the protectionism of the White House (Trump), and secondly, because of the completion of the tax effect reform. Such dynamics forced the Fed to reconsider its forecasts for the next year and slow down the pace of rate hikes next year.
Thus, next year, the dollar will be under pressure from several interrelated factors. The European currency, in turn, depends only on the prospects of Brexit and the dynamics of inflation growth in the eurozone. In particular, ECB Board Member Sabine Lautenschlager said today that the issue of raising rates next year depends on inflation data for the first and second quarters of 2019. If the price pressure increases, the regulator will tighten monetary policy. Naturally, the tough Brexit will erase the hawkish attitude of the ECB. So the British have the key to the northern dynamics EUR / USD. Obviously, with the chaotic Brexit, even a weak dollar will not be able to provide a pair of growth, given the "apocalyptic consequences" of such a scenario.
Summing up this year in the context of the EUR / USD pair, we can conclude that the year was in favor of the American currency. If in January the pair was at 1.25, now the bulls are only trying to approach the 15th figure border. However, the next year will not be easy for the greenback. Too many worries have been coming lately. The negative impact of trade conflicts, the slowdown in the US economy, the slowdown in the Fed's monetary tightening, the uncertain situation in the stock markets, political conflicts within the US, and in the end, Trump's criticism of the Fed. Will the dollar withstand such a powerful onslaught?
Disputes about this do not subside among the experts. In my opinion, the EUR / USD pair has the potential for growth to at least the 17th figure (1.1715 - the top line of the Bollinger Bands on the weekly chart), but with one caveat. If Brussels and London can avoid the hard Brexit. Therefore, it will be possible to talk about the future prospects of the couple already in January, when British politicians will announce their verdict on a historic deal.
