The threat of recession will help the dollar

Asian markets at the opening of trading on Monday supported the negative, which formed on Friday amid reports of the impossibility of meeting Trump and Xi Jinping before March 1, when the new import tariffs imposed by the US should take effect. The Fed’s earlier refusal of the planned rate of normalization of monetary policy should have led to a decrease in the dollar, but the changed agenda suggests the opposite.

The head of the Federal Reserve Bank of San Francisco, Mary Daly, said on Friday that the Fed is actively discussing the possibility of “more regularly” using the policy of quantitative easing. There are grounds for changing the position of the Fed since the world is on the verge of a new recession.

In the 1980s, the Fed, and other central banks behind it began to focus on the federal funds rate to achieve their goals of supporting the economy. The “Taylor rule” works here if inflation is above the target level or unemployment is below the natural level, then the rate should be increased, and in the opposite case, reduced.

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However, in recent years, the natural interest rate has been falling in all large economies, and in the event of a threat of recession, it is no longer possible to reduce it. As part of the fight against the crisis of 2008, the natural rate was about 2% and it was not enough to create mechanisms to support the economy, which led to the need to launch “quantitative easing” programs in the US, the eurozone, the UK, and Japan.

At this stage, only the Fed is trying to reduce the balance, but the Bank of England and Japan, as well as the ECB, have not even started normalization. In the event that the threat of a recession increases, they will have no choice but to inflate the balance sheets even further, since reducing the rate below the zero levels is guaranteed to destroy banks’ incomes. Central banks need some kind of new solution that will preserve financial stability and at the same time not inflate balances and not lower rates below zero. Until this solution is found, the dollar will continue to enjoy demand primarily due to the lack of an alternative.

Eurozone

The eurozone is in a slowdown phase, which is not yet in the nature of a recession, but there is no doubt about the direction. In the economic bulletin published on the eve, the ECB recognizes some of the problems associated mainly with the slowdown in world trade, but it expects economic growth to resume, mainly due to the labor market and stable consumer demand. At the same time, the key parameters of the eurozone economy point to an obvious decline, PMI and an indicator of economic sentiment are declining, which will lead to a decrease in GDP.

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Preliminary GDP data for 4 square will be published on Thursday, the euro in the first half of the week will be under pressure. The situation is aggravated by the growing likelihood of a political crisis, elections to the European Parliament will take place in May, parliamentary elections will be held in April-May in some countries, and most of them have obvious problems with the formation of the budget.

The decision of the United States to increase duties on cars from the EU also exerts strong pressure on the euro, it is unclear at what level the new rate will rise, since 10% seem to have already been decided, and 25% could bring down EUR / USD on a couple of pieces. Today, the likelihood of testing the recent low of 1.1288 looks quite high, even despite the lack of correction when moving from 1.15 down.

Great Britain

The pound closely follows the Brexit development scenario, but we should not forget about the macroeconomic indicators themselves. Already today there will be published preliminary data on GDP growth rates and the volume of investments for the 4th quarter, as well as December results on industrial production and the trade balance. For all indicators, the forecasts are either neutral or moderately positive, the expectations do not allow the pound to decline and lead it to the sideways range.

The currency pair GBP / USD will be trading above 1.2852, but out of range is unlikely, the pound will wait for new data and the reaction of the British Parliament to the EU’s refusal to begin new negotiations on Brexit.

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