USD in the doldrums ahead of key vote
(Arnaud Masset, market analyst)
The end of the week was particularly tense in the FX market after the much-awaited vote from the House of Representatives on the plan to repeal and replace parts of the Affordable Care Act. The US dollar has been trading in a volatile range against most of its counterparts as market participants grow impatient. It may seem surprising that the market is monitoring closely the development of this specific subject as it will not be a game changer for the US economy. In fact, it is widely seen as a test for Donald Trump and his ability to pass the promised reforms. In short, if Obamacare is not repealed, it will seriously damage the market’s confidence and would most likely trigger a sell-off in the equity market and increase selling pressure on the USD.
After sliding 0.25% during the Asian session, the single currency rapidly returned above the 1.08 threshold as European traders stepped in. The dollar index was in free fall as it tumbled 0.30% in a couple of hours to reach 99.697. EUR/USD is currently testing a key resistance area at around 1.08 (Fibo 38.2% on May 2016 - January 2017 debasement at 1.0828 and previous highs); if broken the door is wide open towards 1.10.
Russia set to hold rates unchanged at 10%
(Yann Quelenn, market analyst)
The Central Bank of Russia is due to announce its key rate decision later this morning but we believe that rates will remain unchanged at 10%.
The ruble has been strengthening since the beginning of the year, providing some room for the central bank to lower rates, but we think that inflation expectations are still too high. Even though inflation is dropping at a fast pace it still lies at 4.4% y/y and should prevent the central bank from lowering rates to 9.75%.
The CBR’s cautiousness since its last meeting was mostly due to the Fed hiking rates and although dollar demand should strengthen, the ruble has been performing well. Nevertheless, weaker global oil prices are adding downside pressures on the ruble.
Finally, global uncertainties continue to linger and the central bank has already announced that it will not rush to cut rates. It is likely that policymakers are waiting for GDP to enter positive territory before making any serious moves. For the time being, we maintain our bullish stance on the ruble.