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November 19, 2018 @ 16:15 +03:00
Last week, the US dollar had started off with a confident 0.6% growth, updating the 16-month highs on the dollar index and throwing EURUSD down to 1.1200. However, the American currency has thereafter shifted into a defensive mode, decreasing by 1.2%, as a result of Fed’s dovish comments and lower budget tensions in Italy.
Initially, the single currency was reinforced by the comments on the desire of the Italian authorities to come to a compromise on the budget, although the Government insists on maintaining important reforms.
However, Fed’s hawkish mood had later triggered a decline. Powell highlighted the growth of volatility in the global financial markets, the fading effect of tax reform, as well as the decline in demand outside the United States. All these factors, as noted by the head of the Fed, may interrupt rising rates by the middle of next year.
The news had a serious impact on the dollar on Friday, triggering a 0.6% decline.
Although markets were significantly affected by the commentaries, it is fair to say that there was not substantial information out there to justify such an impact. First, Powell made it clear during his speeches that Fed was all set for the December rate increase. Predictions of the FOMC pointed out a 2-3 increase by 0.25 percentage point in 2019, against 4 hikes in 2018. This slowdown was just a repetition of an already known predicament.
Moreover, promising to make a pause in the mid-year rate hike, Fed returns to the previous scheme that the FOMC used until 2018: a rise in the beginning and in the end of the year, and a pause in the middle.
Simply put, Powell’s comments last week were not as much of startling news as it seemed at first glance.
For the dollar rate, this could mean keeping the overall trend of growth with small reversals as part of an upward trend. Short-term, it is worth to pay attention to the dynamics of the dollar near 95.80 on DXY and the potential of EURUSD to continue its growth above 1.1400.
The fall of the dollar index below 95.50 is capable of becoming a signal of an upward trend, while for EURUSD, such signal would be received in the case of the pair growing above 1.1500.
Such a development would review the prospects of the dollar, questioning the main scenario with further development of the dollar due to a divergence in monetary policy.