Disappointing US macro-economic statistics has triggered the decline in the USD index to the lows since September. The price of the pair EUR / USD has reached the 14-month highs. The base retail sales has been declining for the two consecutive months, the consumer confidence index fell from 95.1 to 93.1%, and the growth rate of consumer prices fell from 1.9% to 1.6% y/y. Now, it will be difficult for Janet Yellen and her colleagues to assure that the slowdown in inflation is of the temporary nature. The head of the Fed has already prepared an excuse, saying that the correction in PCE will force the Fed to reconsider interest rate changes; however the persistence of the Fed in the connection between the "labor market and inflation" may end up in the loss of confidence.
The survey of 63 experts by Wall Street Journal showed that Janet Yellen is the frontrunner candidate for the Fed head after the end of her contract in February 2018. According to the survey, 20.8% of respondents voted for her, 13.7% respondents voted for the ex-president Goldman Sachs Gary Cohen and 11.5% for the former Governor of the FOMC Kevin Warsh. However, meanwhile, negative macro-economic statistics reduces chances of the Fed to implement three of monetary restrictions in 2017 to 47%. This fact also causes the decline in the USD and the increase of speech making. If in 2007 the average wording of FOMC minutes was 214 words, now it consists of the 892 words.
Dynamics of possible changes in the rate of the federal funds in 2017
Source: Financial Times.
Attempts of academics from the universities of Carlton in Ottawa and Hofstra in New York to convince that maintaining the value of the dollar in the world financial system will help to avoid its further decline, are not very convincing. Although the USD holds 64.5% in the currency reserves of the Central Banks, the share of debt obligations nominated in the USD is 42.6%, and the share of the USD in the conversion transactions at Forex exceeds 87%, this does not mean that the competitors of the USD do not have any chances. On the contrary, due to the strengthening of the Euro, its share in the reserves may significantly increase, and the traders of the pairs with the USD can press not only SELL button.
Significance of the USD in the world financial system
Source: Wall Street Journal.
The major currency pair has reached the point when little depends on the Fed. Now, it is the ECB, which has a stronger influence. The ECB is planning to normalize monetary and credit policy without causing panic in the market. Most Bloomberg experts believe that the announcement of the beginning of the process will be made in Q3, and the launch of the program will be made in early 2018.
Forecasts for QE curtailing
In order to “reign in” the EUR/USD bulls, Mario Draghi will need apply strong efforts and measures. One of them may be the possibility of intervention by the ECB to the market in case of the further deterioration of the financial conditions. However, no one knows whether it will help or not.
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