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28.07.2021 04:11 PM
July Fed meeting: preview

The dollar has come to another kind of watershed: following the results of the July Fed meeting, the greenback will either continue to gain momentum throughout the market or will retreat from the positions won, allowing EUR/USD buyers to organize a large-scale corrective pullback. The EUR/USD pair has been fluctuating in the range of 1.1750–1.1830 for the third week in anticipation of a powerful information impulse. At the same time, traders ignored quite important events of a fundamental nature.

For example, the results of the July ECB meeting provoked only short-term volatility for the pair – on the day of the meeting, the euro-dollar pair managed to test first the upper and then the lower limit of the above price corridor. But in the end, the score remained equal – neither the bears nor the EUR/USD bulls could become the beneficiaries of the current situation. The European Central Bank approved a new strategy (which allows exceeding the target inflation rate), but this fact was played back a week before the meeting, when the relevant information was leaked to the press. All the other messages were of the usual nature: the European Central Bank decided to discuss key issues regarding the prospects for monetary policy at its September meeting.

Likewise, traders ignored the speech of Federal Reserve Chairman Jerome Powell in Congress. Powell tried to convince congressmen (and indirectly - traders) that the growth of inflation in the US is temporary and there is no need for an early curtailment of QE. But, judging by the reaction of market participants, Powell could not convince them that the Federal Reserve will continue to "tolerate" inflation, which has already updated multi-year highs.

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Actually, the main intrigue of the July Fed meeting also revolves around this issue. Will the Federal Reserve decide on an early curtailment of incentives or will it stick to the previously declared course? The majority of experts surveyed by Bloomberg and Reuters are confident that the regulator will maintain a wait-and-see position and will not hint at a decrease in the volume of bond purchases. In their opinion, the Federal Reserve, through the mouth of Jerome Powell, will again repeat the mantra that the current surge in inflation will be temporary, while the spread of the delta strain can undermine the global economic recovery.

This is the most likely scenario for the development of events. And perhaps the only option, if not for the hawkish attitude of some representatives of the Central Bank, including those who have the right to vote this year. In particular, a member of the Fed's board of governors, Christopher Waller, recently said that the US regulator "most likely will have to" start reducing the asset purchase program this year, "in order to be able to start raising the base rate by the end of next year." Similar rhetoric was voiced by his colleagues Robert Kaplan, James Bullard, and Loretta Mester.

In fact, Powell himself, following the results of the previous June meeting, said that it was "appropriate to start discussing the beginning of curtailing stimulus" at one of the next meetings, "if progress in the economic recovery continues."

More than a month has passed since then (i.e. since the June meeting). Most of the key releases came out in the "green zone", thereby confirming the notorious "progress in recovery". American inflation has been showing record growth for the past three months, and Nonfarm Payrolls allow us to talk about healthy trends in the labor market (850,000 jobs were created in June). Some other, equally important macroeconomic indicators also fuel the "hawkish " expectations of investors. In particular, data on spending and income of Americans came out either at the level of forecasts or in the "green zone". For example, the main index of personal consumption expenditures (Core PCE Price Index) rose to the 0.5% mark on a monthly basis and accelerated to 3.4% in annual terms (the best result since February last year). Investors were also pleased with the latest data on the volume of retail sales in the United States. The published figures significantly exceeded the forecast values. Thus, the total volume of retail trade in June increased by 0.6% MoM, while experts predicted its reduction by 0.4%. Excluding car sales, the indicator showed a stronger result, rising by 1.3% (with a growth forecast of only 0.4%).

In other words, the main macroeconomic reports allow the Federal Reserve to tighten its rhetoric, allowing an early curtailing of QE and an increase in the interest rate next year. On the other side of the scale is the delta strain of coronavirus, which is rapidly spreading around the world, including in the United States (the number of both sick and hospitalized is growing). At the same time, the rate of vaccination in the country has slowed down. According to statistics, approximately 188 million Americans have received at least one dose of the COVID-19 vaccine (56% of the total population). About 163 million Americans (49% of the population) are fully vaccinated. For comparison, it can be noted that in the UK, 70% of the adult population is already fully vaccinated.

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All this suggests that the intrigue regarding the results of the July Fed meeting remains. It can be assumed that the regulator will not announce an early curtailing of QE today, but will tighten its rhetoric, recognizing that inflation and economic growth have exceeded the trend. In this case, traders will continue to speculate about the Fed's further actions. According to some analysts, at the economic symposium in Jackson Hole (which will be held at the end of August), the Chairman of the Federal Reserve will sound a more "hawkish" signal regarding the fate of the stimulus program and rate hikes next year.

Trading decisions on the EUR/USD pair should be made following the results of Jerome Powell's press conference, since the key theses of the accompanying statement may be misinterpreted by the market. If the buyers of the pair do not hold above the resistance level of 1.1830 at the end of the day, we can consider short positions with the first target of 1.1750 (the first support level) and the main target of 1.1700.

Irina Manzenko,
الخبير التحليلي لدى شركة إنستافوركس
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