Christmas situation: what to expect from the market?

Dear traders, let us review the economic events of the past week. Last week the US dollar index rose after the quite optimistic Federal Reserve statement released at the conclusion of its meeting on Wednesday. The decline of inflation in November to 1.3% notwithstanding the considerable monetary expansion that the Federal Reserve undertook during the recently ended QE program was another positive factor. The Fed Chairwoman Janet Yellen announced that the central bank may consider increasing interest rates “after a couple of meetings” next year. We deem this reflects an increased hawkish stance of the central bank that will result in strengthening the plans for monetary policy tightening. The implied increase in yields increases the demand for US dollar. The next Fed meetings will take place on January 28, March 18 and April 29. Previously most investors expected the interest rate hike could happen only in the second half of the next year or even at the end of the next year. There are other positive developments also. The Federal Reserve justifies its plans by forecasts projecting that the US economy will grow between 2.6% and 3.0% next year.

The unemployment, which is currently at a six-year low rate of 5.8% may fall to 5.3%. The Federal Reserve also expects that, due to falling oil prices, the inflation will be in the range between 1 - 1.6%, which is much lower than the 2% target level.Majority of investors now expect that by the end of the next year the federal funds rate will rise to 1.125% compared with the current rate of 0.25%. This is quite a positive outlook for the US dollar index. The rise of the US dollar index though has slowed down now as it has approached the 90 level, which is considered a strong psychological resistance level by many market participants. We do not exclude the possibility that the dollar index may trade sideways for some time.

The current week will be short one on the Forex market due to Christmas holiday on Thursday. The most significant economic data in US will be released on Tuesday – the Durable Goods Orders and Personal spending. We believe their outlooks are positive for US dollar. No economic data of particular significance are expected to be published in Eurozone this week. Important macroeconomic data on unemployment, industrial production and inflation will be released Wednesday night into Thursday in Japan, as well as the Bank of Japan meeting will take place. We believe the tentative forecasts indicate further weakening of yen. This was all for the week.