How occasions affect regularities

FRS will be required to raise rates, not so much for the growth of the US economy, as for prevention and elimination of bubbles on debt and stock markets
Last week was noted for Chinese disastrous data, decisions regarding Greece, and controversial reports on American companies. Investors locked profit in stocks on any data that came from the US, and in case of a slightest danger disposed of raw materials assets. Last week, FRS publicized a number of interesting researches according to which market expectations for rate increase seem to be quite substantiated:

  1. The researches on inflation growth perspectives showed that inflation will grow in case of active growth of industry and labor market.
  2. Revaluation of industrial production rates over the last 5 years showed that the tendency is steadily negative, June 2015 showed growth decline to 0.2% against 0.3%, capacity utilization fell to 77.8% against 78.4%.
  3. According to the FRBNY, the researches made on the influence of high dollar rate on GDP show that the growth of the rate by 10% reduces US GDP by 0.5% in the current year and by 0.2% more in the following provided that the current value is retained.

Besides, last Friday, without attracting too much attention, FRS produced the publishing of its own internal predictions (and models of their calculation) submitted to the June 17 Meeting. That information was included in the published documents as of June 29; therefore, FRS considered it as necessary to introduce them officially and provide explanations. The following results from the information presented:

  • It is planned to have 1 increase in 2015, and further, the following statistics are expected (after the year is over): 2016 –1.26%, 2017 –2.12%, 2018–2.80%, 2019 –3.17%, and 3.34% at the end of 2020;
  • Inflation forecast - less than 2% until 2020 (inclusive);
  • Trade weighted FRS index of US dollar has grown by 22.28% since June of the previous year and the following is expected: June 2016 must produce (+21%), June 2017 (+18%), 2018 (+17%), 2020 - (+10%).

That means that forecasts are quite negative, no inflation growth even in mid-term perspective is expected despite confidence radiated by Yellen and promises to reduce the influence of high dollar rate factor under low prices for energy resources since the beginning of 2016. However, FRS will be required to raise rates, not so much for the growth of the US economy, as for prevention and elimination of bubbles on debt and stock markets; therefore, a very much neutral release note is quite unlikely. According to all that information, FRS' July 29 Meeting must turn out as transitional, rates will not be dealt with, Yellen's press-conference will not be held, and no publication of any forecasts by the Committee members will be expected. Nevertheless, the current week may lead to resumption of the trend for dollar strengthening with its further development until the end of the month. Vast majority of investment predictions expect increase in September, while the market reduces those expectations continuously. As always, analysts will look for hints in the release note. That discrepancy may produce a strong dollar growth, if such signals are still found in the FOMC statement.

Despite almost empty calendar, the week is going to be interesting and badly predicted. It is a high season of publication of American earnings reports - this week, we will be waiting for S&P 500 Index reports of about 165 companies. Let's keep Greece in mind, since it has created problems again during negotiations regarding 86 billion euros - we even had to postpone the visit of the Trio representatives to Athens. It is quite possible to expect new troubles. Complex voting for remaining debatable bills in the Parliament on August 7 will be the main event. Until then, there will be active negotiations with the Trio for small trade-offs.

Pound, which suffered very much last week, will issue a report on GDP for the second quarter; it is expected to have acceleration of growth rates, and aggressive forecasts on English rates will become relevant again. Great Britain has a good chance to take inflation to the level of 2% at the beginning of 2016, and then, provided that FRS rates will be raised in September, it will be possible to restructure their own rates. The closest targets are the following: resistance 1.5730/1.5675/1.5574/1.5563, support 1.5475/1.5466/1.5430/1.5400. Range rebound trading is more preferable.

GDP report in the USA - revision of annual data is expected; it is tied up to seasonal factors, and increase of indicators for the first quarter. Eurozone statistics (after the German positive on Monday - inflation and labor market in Germany, Spanish GDP, inflation and labor market of EU countries) should be tracked for ECB perspectives and recovery of prices for raw materials. Key risks for downfall of the main currency remain:

  • Since Greece's decision for leaving Eurozone was removed from the agenda (Weidman), funding of carry trade operations is actively executed in euros again, which produces negative earning;
  • The value of volume of net short speculative positions is quite far from extremal, which means there is a range for new sales;
  • The situation on German debt market has practically stabilized after the March crash, when there was a rough closure of a large volume of short positions in EUR/USD;
  • Oil resumed stable decline, which practically kills hope for fast inflation effect from the program of ECB assets purchase;
  • There is a traditional threat of US rates raise in the current year and dollar growth that will follow it.

Author: Navsher Bartash,
ForexChief Currency strategist