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21.03.2019 09:05 AM
Fed: bets are made, there are no more bets

Yesterday, the worst fears of dollar bulls were confirmed: the US Federal Reserve took an extremely "dovish" position at its March meeting, leaving no chance for a rate hike in the current year. Contrary to controversial rumors about a split in the Fed's camp, this decision was taken unanimously. Now, the phrase used by the regulator about "showing patience" has acquired quite specific time frames, and this fact has weakened the dollar's position throughout the market.

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In addition to revising the "point forecast," the regulator also lowered the forecast for US GDP growth for the current year (from 2.3% to 2.1%), thereby stating the existing problems. The inflation forecast has so far remained the same - the PCE index, according to members of the regulator, should fluctuate in the area of the 2% mark up to 2021. Although, judging by the rhetoric of Jerome Powell, he is personally not sure that the key indicators will demonstrate a strong positive trend. He stated that since the autumn of last year, statistical reports show a weaker (than previously predicted) economic growth. In particular, disappointing retail sales speak of a slowdown in spending.

It is worth recalling that the most important indicator of consumer spending in January rose by only 0.2% after a crashing fall in December (then the growth rate of the indicator was the weakest since September 2009). In addition, at the beginning of this year, inflation growth and production indicators slowed down, complementing the overall negative picture. Summarizing what was said, the head of the Fed said that the current financial conditions are now "more accommodative" compared to the earlier period, so the regulator is forced to take a wait-and-see attitude.

Powell also said that the Fed is planning to complete the process of reducing the balance by the end of September this year. According to him, by the autumn the size of assets on the Fed's balance sheet will be about 17% of GDP compared to the maximum value of 25%. This fact is similar to "not pleased" dollar bulls amid all the other decisions of the regulator.

However, despite the "dovish" results of the two-day meeting of members of the Fed, the US currency holds firmly enough. After the southern impulse to the borders of the 94th figure, the dollar index is trying to recover, stopping its fall. A similar behavior is observed in the euro-dollar pair. Taking advantage of the situation, buyers were able to enter the 14th figure, but they were unable to further march-throw. Therefore, now the minimum task for bulls EUR / USD is to keep within the conquered positions, and the maximum task is to break through the resistance level 1.1490, which corresponds to the upper line of the BB indicator, and which also coincides with the Kijun-sen line on the weekly chart. Only in this case, buyers can confirm the priority of the upside movement with a hint of a trend reversal.

In the meantime, this price movement resembles only a correction, which is caused by the weakening of the US currency. However, the initial impetus faded, and now traders have to decide: whether to buy the dollar in a recession or still get rid of the greenback, given the long-term strategy of the Fed? The further motion vector of the EUR / USD pair will depend solely on the answer to this question, since the European currency does not have its own arguments for growth.

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It should also be noted that the regulator did not "frighten" the market with monetary policy easing at the March meeting. Although some Fed representatives had previously voiced similar ideas (albeit hypothetically), then the likelihood of a rate cut this year increased from zero to 9%. Yet, the Fed has only chosen to pause the process of tightening monetary policy, recognizing the current level of rates as "neutral." The question of reducing the rate, in my opinion, will be relevant only if core inflation is actively reduced for several months in a row, showing a strong tendency to slow down. If the key indicator fluctuates around current levels, the Fed is unlikely to change its position, as announced yesterday.

Thus, the dollar lost the "basic" element of its support yesterday. Last week, there were rumors in the market that a split had matured in the camp of the American regulator: some were supposed to keep the rate until next year, while others insisted on one round of rate hikes, despite low inflation. The results of the March meeting showed that the Fed unanimously decided not to rush into active actions this year.

In part, this decision was taken into account in the prices, so the dollar was able to contain the onslaught and suspend its fall. Nevertheless, this does not mean that greenback will return its position: the further dynamics of the eur / usd pair will depend on Brexit and China (the US-China trade negotiations). After the dollar bulls lost the Trump card of support to the Fed, they can only hope for an increase in anti-risk sentiment when the dollar is in high demand. Therefore, the focus of the market will shift to Brussels now, where the fate of the "divorce process" will be decided in the near future.

Irina Manzenko,
Analytical expert of InstaForex
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