American Economy: Weekly Dollar Analysis
Although the odds of rising interest rates increased over the past two weeks, we saw a downside correction in the US dollar. The Dollar Index is near the recent two-month high. now, The Federal Reserve’s interest rate has risen to nearly 80 percent in December, while a month ago, the chance to raise interest rates was only 22 percent.
There are many events in this week that can affect the market interest rates sentiments. This week, the latest report of Federal Reserve Committee meeting (FOMC Minutes) will be released. The report relates to the September meeting and could provide a good image of the American Federal Reserve’s officials in investors viewpoint.
Nevertheless, traders should note that most Federal Reserve officials spoke after the September meeting. Although there are disagreements among Federal Reserve officials regarding the issue of raising interest rates, the central core of the committee that decides about the interest rates will be happy due to strength inflationary pressures. The Minutes report is usually updated and checked until the last moment before being realized.
Accordingly, the September CPI report could be a major event for the market. Consumer inflation index rose by 2.3 percent, the highest level in the last six months. Continuing improvement in US economic growth causes the economic reports released since mid-June be better than predictions. On the other hand, in December wage growth was 2.9 percent annually, the highest wage growth since May 2009. That means the probability that American inflation reports be better than market sentiments is serious.
However, still, political issues can divert investors’ attention from economic issues. Negotiations between the United States, Canada, and Mexico on the NAFTA deal (North American Free Trade Agreement) will be the focus of the market’s attention this week. Donald Trump, in relation to the talks, said that “The negotiations would probably be defeated, and the free trade agreement would be canceled”. Tramp did not speak about the details of this issue, and it is not yet known whether there is really a serious problem in the negotiations, or whether it was just a comment on domestic consumption.
Tramp will also speak about American politics against Iran. There are speculations about the change or cancellation of the deal, if this event happens, the Congress will have 60 days to re-enforce the sanctions. In this case, Iran’s nuclear deal with global powers is likely to be canceled.
The abandonment of the North American Free Trade Agreement and the success of the deal could lead to intensify the risk aversion market and reduce the chances of rising Federal Reserve interest rates. However, it should be noted that the worst scenario for both international contracts is likely to be low. Even with the assumption that the worst scenario will happen, the NAFTA negotiations will take some time and maybe the Congress will refrain from reviving previous sanctions against Iran.
Finally, it should be noted that the US dollar is the strongest secure asset in global markets, and if the severity of risk aversion is too high, the US dollar will be strengthened in the face of demand for secure assets. This means that even with problems on the upside of the US Dollar index, the next resistance index is still at a higher level.