FX.co ★ Weak inflation will soften the dollar

On Tuesday, the US dollar gained considerable support on the wave of growth in market volumes after the end of the long Christmas and New Year holidays.

The dollar significantly grew against the single European currency on the background of profit taking after the growth of the major currency pair at the end of last year. But on Wednesday today, the consolidation has stopped during the Asian trading session, and even a slight closure of long positions on the US currency has been noted. This market behavior can be explained by the alignment of positions by market participants during the publication of the important data on production and consumer inflation, which will be released later this week in the United States.

The question is about the influence of main drivers for the dollar's growth rate. As for the influence of the tax reform factor, it is fully considered in the dollar quotes. Currently, the markets will observe its influence on the American economy. But it should be acknowledged that the markets are growing pessimistic and the tax reform will contribute to the new US economic market. Earlier and now, there are voices of criticism that claims to be limited and will allow the rich to get even richer, and save the poor rather than to spend what will undermine the very foundation of the modern US economic model based on consumption. Naturally, if the American consumer spends less, it will affect the level of inflation which means that the Fed will have more difficulty in implementing its plans aimed at raising rates that will ultimately restrain the strengthening of the dollar.

At the same time, the probable strengthening of the positions for other major currencies, at the expense of the possible changing of Central Bank monetary policies to the countries which they belong, will exert pressure on the dollar and restrained its growth.

In order to change the situation dramatically, strong inflation data is needed in the United States. But whatever the situation may be, the question remains open.

Forecast of the day:

The EUR/USD pair is trading at 1.1935, a decline below this level could possibly continue to fall at 1.1900.

The USD/JPY pair is expected to continue consolidating in the range of 112.00-113.50. But overcoming the level of 112.00 on the wave of weak inflation data from the US indicates a probability of a decline to 111.50-55.

* The presented market analysis is informative and does not constitute a guide to the transaction.