The foreign exchange market continues to float in a sea of uncertainty, which remains and is supported by a number of reasons that have not disappeared. Select the most important of them. The first is the situation around Brexit, the second is the lack of understanding of whether a new trade agreement will be reached and when between Washington and Beijing. The third is whether the Federal Reserve will hike interest rates this year or not. And now everything is in order.
The situation around the UK exit from the EU can no longer be compared with a theatrical production, but with a full-bodied drama with elements of absurdity and comedy. British authorities have driven themselves into such conditions and it is absolutely unclear how this problem will be resolved. The decision of the Parliament to postpone the beginning of the country's withdrawal from the EU for two months shows that there is no consensus among the deputies on this issue, which may never be found in a form that satisfies everyone. This means that hopes for a decent exit of the country from the European Union may not be found, and if it will be so, then the pound expects a new landslide fall that is already on the risk of growing separatist sentiments in Scotland and Northern Ireland.
The epic of the trade agreement between China and the United States is also worthy of a theatrical production. Amid positive statements from Washington and optimism from Beijing, the final trade agreement was never reached. The main meeting between D. Trump and Xi Jinping is constantly being postponed. The first time was to be held in January, then it was postponed to February, then to March, and now it is planned somewhere in the middle of summer. And although there is a trade truce between the two countries, the risk of escalating tensions still remains. This is a strong deterrent to optimism in the markets, which is pulling the global economy into recession with all the ensuing problems.
Finally, the topic related to the Fed and its monetary rate. Now investors expect that the US regulator will stop the process of further hiking interest rates, then reducing the balance sheet, and maybe even on the likely wave of continued slowdown in the growth of the US economy, it will begin to lower rates. But the market misses a high probability that before the bank stops making a decision, it may raise rates one more time in the middle of this year or in September and even then announce that the next cycle of growth in borrowing has stopped. The reason for this continues to be the excellent state of the labor market and the sustained growth of the economy, which, however, somewhat slowed down the growth rate, but still remains quite good. The probability of another rate hike will support the dollar.
In reality, perhaps, we will know what the Fed is planning from the results of the two-day meeting of the regulator starting today. If it really makes it clear that the cycle of rate hikes is over, it will strike a strong blow, albeit limited, to the dollar. But if the Fed will "swim in the testimony", the weakening of the dollar will again stop, the sideways dynamics in the foreign exchange market will continue.
Forecast of the day:
The EURUSD is trading below 1.1355. We believe that it will continue to consolidate in the range of 1.1300-1.1355 in anticipation of the outcome of the Fed meeting on monetary policy, which will be known on Wednesday. From a technical point of view, the pair can continue to grow to 1.1400, if it overcomes the mark of 1.1355. Its supporting factor is the market's hope that the Fed will not raise rates further.
The USDJPY pair broke through the support line for a short-term uptrend in the wake of continuing uncertainty in the expected outcome of the Fed meeting. If the price overcomes the level of 111.10, it will rush to 110.60.
