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World markets continues to decline. A sharp recovery in US stock indices could indicate a decrease in the panic wave, however, a number of other indicators, such as the price of gold and oil, or demand for bonds, still indicate a high level of risk that will not allow markets to return to the growth path.
Recently, the US financial authorities have been solving several problems at once, which have a direct impact on the forecast for the dollar. The panic that gripped the markets is largely a result of the weakening of the yuan below 7, which means an increased pressure on all commodity currencies. The yuan will drift to the level of 7.30, since there is a serious risk of further escalation - the United States may well raise tariffs from 10% to 25% if not at the end of the year, then at the beginning of 2020, and such a prospect will limit the risk appetite in the second half of the year.
The yield curve for 2-year treasures has already been inverted; 3-month bonds are next in turn, so the market expects the Fed to continue to lower rates. These expectations are fueled by Trump's position, which requires more aggressive actions to combat the approaching recession.
Lower rates will have an undoubted economic impact, especially in the housing market, so the Fed will have no choice but to continue the cycle of reducing rates.
The second problem directly affects the liquidity of the dollar and, as a consequence, its exchange rate. On August 2, Trump signed a bill to extend the public debt ceiling by two years, which will allow the government to borrow money indefinitely until July 2021.
The consequences of the new bill completely change the balance sheet with liquidity. This year, the situation was such that by September the Treasury would have exhausted all the limits and could no longer hold, which in fact would mean default, if it had not been for the possibility of using hidden reserves, namely a single treasury account (General Cash Account, GCA) in the Fed. The use of this account would lead to an influx of liquidity into the banking system, which, along with a reduction in Fed rates, could weaken the dollar in the foreign exchange market.
Now, everything looks completely different. Instead of adding liquidity to the system, the Treasury, taking the opportunity of unlimited loans, will withdraw liquidity, primarily in order to restore the GCA to a normal level. At the moment, about 125 billion are in the account. The Treasury considers the range of 350-400 billion to be normal, which means the withdrawal of about $ 250 billion by the end of the year.
Thus, the dollar has every chance to continue to strengthen at the moment. Even the threat of a further reduction in the rate will not allow it to start lowering, because in the face of the fight against the upcoming recession, the demand for protective assets will remain stably high.
EURUSD
On Thursday, the ECB published an updated economic bulletin, which highlighted the risks of lowering inflationary pressures. In order for the financial conditions to remain favorable, monetary stimulation should be continued; thus, the first practical steps should be expected in the fall.
In addition, the ECB expects a decrease in general inflation in the coming months. This factor will contribute to the weakening of the euro, since it increases the risks of a stronger stimulus package than the market currently expects.
On Friday morning, the euro looks neutral. It is trading in the range 1.1165 - 1.1249 during the day, with a slight downward trend towards the end of the day. In the long run, the euro is likely to continue to decline and is able to go below 1.10 in the coming weeks.
GBPUSD
Despite the fact that Brexit has every chance to take place without any deal, macroeconomic indicators also do not contribute to the growth of positivity for the pound. In the history of observations since 1995, the retail trade in July set a record for this month, food shortages are forecasted due to trade chaos by the end of the year, and the chances that the Bank of England will begin its actual incentive program in the coming months are growing.
The pound looks neutral on Friday before the publication of macroeconomic data. The nature of the consolidation indicates a growing danger of a break down. The support level of 1.2978 may fall if the data turn out to be worse than expected. Therefore, there are no reasons to return to the growth path.
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