FED makes U-turn setting ground for USD reversal

TVC:DXY   U.S. Dollar Currency Index
The Fed's sudden warning to prepare for December rate hike and the early release of Trump's tax plan seem to have urged the bears to call off their plans for greenback for a long time.

The yield on US Treasuries posted a sharp jump in inflation expectations on Tuesday after the Fed chief literally hurried the markets to change expectations on monetary policy . For a long time, calling for caution, Janet Yellen suddenly stated that it may be “imprudent” to delay tightening of the policy waiting for inflation to reach the target level. It is curious that “imprudence” has been revealed about the same time as it became known about the imminent release of Trump's large-scale tax plan and the relative breakthrough of the bearish blockade in the oil market. Anticipating his first serious bill since the beginning of the presidency, Trump promised a “tremendous" tax cut for the middle class. This will lead to an increase in the money supply to the economy and that it will logically require higher rates to control inflation , which the Federal Reserve hastened to warn about.

Such prospects really convince that the dollar is "ripe" for medium-term purchases, at least with the current stock of enthusiasm.

What is interesting is that a month ago the chances for a rate hike were only 20%, while today they have grown to almost 80%. Such "volatility" in the position of the Fed makes it difficult for the long-term forecast of the dollar's movement.

The US currency stopped the monthly drop, trading above 93.00 against the basket of major currencies on Tuesday. The surge in gold on the Korean crisis has rapidly faded, as the Fed's rate hike factor outweighs geopolitical threats. Despite all the aggressive rhetoric of the United States, there is a reluctance to get involved in a direct military conflict and preference to search for a diplomatic settlement to the crisis.

UK retail sales data

The pound sterling is down for the fourth day in a row, as the broad intentions of the dollar to regain lost ground touched also the British currency. Investors cut long positions before the release of data on retail sales in the UK, an important consumption indicator, which will determine the rate of increase in rates by the Bank of England.

Having jumped to a 15-month high of $1.3650 on BoE officials' comments on the need to raise rates, the pound went into correction, on fears that the fundamental data might not correspond to the hints of the regulator. It is interesting that pound may strengthen on a weak retail sales reading, as the decline in household consumption was in response to the gap between rising prices and wages, which the Bank of England wants to fix. On Wednesday, the British currency was at a two-week low, trading near $ 1.34.

A new high

Turkey's closure of its border for oil from Kurdistan, a region in northern Iraq, has become an excellent opportunity for traders to feel the resistance at $60, the highest level since June 2015. On Tuesday and Wednesday prices retreated as the decrease in US stocks by 760K barrels indicated an increase in the load of the refineries. Until oil refining volumes recover to their natural level (about 92-93%), the output of American shale companies will probably work to cover the deficit and their response to the recent price increase above $ 55 is difficult to predict. Last week, as the report showed, the workload was 83.2%.

Arthur Idiatulin
This analysis is provided as general market commentary and does not constitute investment advice.