Last week was rather uneasy for the US dollar, however by the end of it the US Dollar Index closed in the green. The major pressure on the greenback was from the weak report on retail sales and the news that North Korea launched yet another missile, the trajectory of which was over Japan. In contrast, positive drivers that backed up the greenback may comprise a climb in stock exchanges, particularly the S&P500 Index hit the record 2500-point low. Additionally, the increase in yield on US debt securities still continues, and the yield curve of US government bonds keeps moving up.
This week's major events are going to be a US Fed's meeting, which will affect the performance of global financial markets. It will be a two-day meeting, and the results will be released on Wednesday. An interest rate decision is expected and comments on monetary policy and reviewed economical outlook, then also a press conference by Janet Yellen is to take place. However, it is worth noting that, according to interest rate futures, markets are not expecting any change in the rate at least for the next two meetings. The higher likelihood - which is slightly over 50% - for the rate to be between 1.25% and 1.5% is for December's meeting. We tend to agree with the general market opinion. The larger reason is still the same: a low inflation growth. However, a smaller-scale reason is, for example, devastating destruction left after the hurricanes. The most what we can expect to hear is probably only some details on how the US Fed will be cutting its balance.
In the meantime, the most significant data released on Monday were statistics on inflation in the eurozone. The data were neutral. The CPI matched the forecast and was 1.5% y/y. The EUR/USD currency pair was positively affected by the statistics combined with a weakening US dollar. If to look at the bigger technical picture, quotes are now stuck in the sideways trend between the support at 1.18 and resistance at 1.20. Considering the current dynamics, we would expect a movement in EUR/USD towards 1.20.
The pound looks appealing in the medium term. After a rapid climb last week in the light of the inflation data and an increase in the likelihood of monetary policy to be changed. Note that there seem to appear more and more advocates in the Bank of England for increasing the rate, to which the pound has reacted actively. Nevertheless, considering the strong climb, a correction is not unlikely in the nearest future.
In the oil market, there were sales on Monday; however, the overall prospects are still positive. Quotes look confident amid the recent natural disasters in the US, plus a meeting of the OPEC+ technical group will take place on September 21. Perhaps during this meeting new recommendations on prolonging the agreement will be given. Brent oil, within the current wave of price growth, has potential to move to the $57-$58 per barrel area.
On Friday, the Central Bank of Russia, taking advantage of inaction by the US Fed, and amid a considerable deviation from the inflation target, cut the interest rate by 0.5% to 8.5%. This step seem to be reasonable and positive to speed up the economy. First, a strengthening inflation is expected in the autumn. Besides, there might be a growing interest in carry trades. As the yield has decreased, investors will be now very closely monitoring Russia's credit risks, which means that the ruble volatility may rise because of the local factors. From a technical perspective, we would expect a correction with a target at 58.5 in the USD/RUB currency pair.
Ivan Kapustyankiy, equity analyst at Forex Optimum