USD: Fed and EU Brexit Summit

USD: Fed and EU Brexit Summit

18 October 2018, 11:40
TifiaFX
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Current Dynamics

The US dollar strengthened significantly on Wednesday against the background of uncertainties on Brexit, and after the publication of the minutes from the September Fed meeting.

According to protocols published on Wednesday, the US central bank is going to continue to raise interest rates until the economy slows down. Despite the fact that “two participants (FOMC) noted that they will not support the introduction of a restraining policy in the absence of obvious signs of overheating of the economy and inflation”, in general, the Fed leaders are inclined to believe that the rates are low enough to stimulate lending, investment and expenses that support economic growth.

In the minutes of the September meeting, published Wednesday, the Fed signaled the possibility of another rate increase in 2018 and three increases in 2019. According to the leaders of the Fed, raising rates will prevent overheating of the economy and keep inflation at a target level of 2%. Higher interest rates usually increase the demand for national currency.

Investors also prefer the dollar during the period of trade instability, as this currency gets support due to faster economic growth than in other countries. US economic growth is now higher than a couple of years ago.

At the same time, representatives of the UK and the EU, according to press reports, find it difficult to come to a consensus to make progress in the Brexit talks, and this raises doubts that the parties will be able to reach an agreement at all. The EU is ready to extend by one year the transition period for the UK to break the deadlock. The achievement of a trade agreement remains questionable, and the parties argue that they are stepping up preparations for the case of a British exit from the EU without an agreement.

Against this background, the pound remains under pressure. A spokesman for the Bank of England, Canliff, said on Wednesday that “the British pound may experience a "strong fall" in the event of a "bad Brexit".

As a result, the growth of the US dollar on Wednesday was the strongest in the last two weeks.

The DXY dollar index, which tracks the US currency against a basket of 6 other major currencies, rose 57 points to 95.35 on Wednesday. The yield on 10-year US Treasury bonds on Thursday is kept in the area of ​​maximum marks (3.203%) after last week it reached 3.261%, the highest mark in 7.5 years. It also helps to strengthen the dollar.

 


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