The US dollar reached its 14-month low, equal to that one in October, as it fell against a basket of currencies. The pressure on it is exerted not only from the negative data on consumer inflation and a slowdown in the economy but also some of the political problems.
On Tuesday, it became known that Republicans, supporters of President D. Trump, attempted to conduct a medical insurance program through Congress but failed. Once again, the president's inability to pursue his political and economic course was stalled at all stages and levels by his political opponents. This news triggered new sales of the US dollar again. It seems that the hopes of the market for the implementation of an economic reform will fall amid a backdrop of political struggle.
Investors reacted to the news on Tuesday regarding the dollar sales, which stopped at the auctions in Europe. Now, it is possible to say that all attention of the market will be drawn to ECB decisions on the monetary policy at its meeting tomorrow.
In our view, the regulator would have a difficult time, maneuvering between the hints about the change of the course to the tightening of monetary policy (which is exactly what the markets are waiting for) and the complete rejection of these changes. If there would not be the weak data on US inflation, as well as the "dovish" rhetoric of J.Yellen in the US Parliament on the prospects for monetary policy, it would be easier for the European Central Bank to follow the Fed on the way towards normalization of the monetary policy. However, the strong fall of the dollar, as well as the likelihood for a pause in raising interest rates, led to the strengthening of the euro. Most likely, this process will continue if the ECB remains silent tomorrow and does not let the markets understand that it is too early to expect a change in the exchange rate.
By and large, the regulator does not have any reasons for this. The economic growth remains weak and the GDP on an annual basis grew by 1.9%. The inflation remains significantly below the target level of 2.0% and comprised of only 1.3% in annual terms.
Assessing this situation, we believe that the ECB meeting tomorrow will not risk informing the markets of a change in the monetary policy and will speak of it as a distant prospect. If all goes well, we should expect the euro to decline in the foreign exchange markets.
Prediction of the day:
The EUR/USD pair is trading above the level of 1.1525. The pair could drop if the results of the ECB meeting does not support the market expectations of a change in the monetary policy. In this condition, the pair may fall to 1.1485 then to 1.1380.
The USD/JPY pair is above 112.00. If the bank retains the current course of monetary policy, it can rally after the meeting of the Bank of Japan, which will be held tomorrow. On this wave, the price could jump to 112.85.