US raises rates: EURUSD and GBPUSD forced to decline

The deputy head of the US Federal Reserve, Richard Clarida, said that the regulator sees no reason to change the rate either to one or the other. According to Clarida, the weakness of inflation, which caused some concern to the Fed earlier, was largely due to temporary factors, and we should expect its growth. The inflation report for April will be published on May 10. The forecasts are positive. It is expected that inflation rose from 1.9% to 2.1%. At the same time, the dynamics of Tips bonds indicates that expectations are moving in the horizontal direction, that is, the business does not yet see the reasons for the inflation growth, which means that on Friday the markets can expect an unpleasant surprise.

Perhaps the performance of Clarida was intended to reassure the markets after it became clear that the Trump administration had raised the stakes in trade negotiations with China. The official publication of the intention to increase import duties from 10% to 25% on Chinese goods in the amount of $ 200 billion may indicate that there is no progress in trade negotiations, the likelihood of currency war escalating.

Market expectations for the rate, according to CME, indicate a more than 50% chance of a one-quarter-per-cent reduction in the rate this year, and not at all. Such a move on the part of the Fed will be equivalent to recognizing that the new wave of the crisis officially began. The obvious reaction of the markets – rising panic and demand for defensive assets – will lead to a stronger dollar and the development of a downward trend in stock markets, and thus provoke an approaching recession which is clearly not included in the plans of the Fed.

On Friday, new information will be provided. While fears are growing, it is not necessary to expect the resumption of growth of stock indices. Asian indices are completely in the red zone, July futures for Brent went below $ 70 per barrel, the demand for the Japanese yen is rising, which came close to a 3-month peak of 109.7, which is likely to be attacked in the very near future.

EURUSD

The head of the ECB, Mario Draghi, speaking to students in Frankfurt, said that the incentives used by the regulator created more than 10 million jobs and contributed to the growth of wages. At the same time, he was forced to point out that the growth rate of inflation is still significantly lower than the target set by the Central Bank of 2%.

The European Commission, in a semi-annual report published on Tuesday, repeats the words Draghi word for word, but adds that in 2018 the price increase was due to rising energy prices, and taking into account the likely slowdown in oil prices, low inflation by the 3rd quarter will be combined with negative basic effects about the economy as a whole.

The euro on Wednesday was unable to find support for positive data on industrial production in Germany in March, an increase of 0.5% instead of the projected decrease of 0.5% does not change the long-term tendency towards stagnation. EURUSD is at the upper border of the downward channel, where sales are resumed with a high probability, the immediate goal is to support 1.1182, then 1.1165 and 1.1134.

GBPUSD

Friday is expected to publish a large package of macroeconomic data on the UK economy. Preliminary figures on GDP growth rates in Q1 2019, industrial production and the trade balance in March will be published, plus NIESR will offer its forecast for economic growth as of April.

Forecasts are generally neutral and have no significant pressure per pound. Nevertheless, GBPUSD has been falling for the past week. The negative dynamics are more political than economic. The expected compromise on Brexit between the main political forces of Great Britain did not take place. The meeting between Teresa May and Labor leader Corbin again failed on Wednesday. Conservatives are losing local elections, and by October the political landscape may completely change. This increases uncertainty, and amid weak macroeconomic indicators will not allow the pound to resume growth.

Today we can expect a fall in support of 1.2987, further target 1.2943.

The material has been provided by InstaForex Company – www.instaforex.com

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