The attention of the market today will be focused on the Fed's final decision on monetary policy. Although investors do not expect any changes in the monetary rate, they will be extremely attentive to any word of J. Powell at the press conference regarding the likely future changes in the issue of government bond repurchases.
The June meeting of the US regulator could actually be important for financial markets. First, it is expected to publish updated forecasts of the long-term development of the national economy and the main macroeconomic indicators. This is what the Fed assumes in terms of the GDP figures, unemployment, inflation, and the level of interest rates for the coming years. But still, the focus will be on the labor market situation and the inflation outlook. This is especially true on the wave of the latest data on the number of new US employment and the strong surge in inflation for almost the entire last decade.
However, J. Powell's press conference can also be the focus of attention. The currency markets will absorb everything he says with great attention. Any mention of the topic of a prospective change in the course of monetary policy in the direction of tightening, and the first sign may be hinting at the beginning of reducing the Central Bank's balance sheet by reducing the volume of government bond purchases, will set the markets in motion.
First of all, the public debt market will react. We can observe the beginning of sales of Treasuries, which will cause a wave of profitability growth. After that, the stock market will react to possible hints, which will definitely cause a global trend reversal (growth to fall) in the future since investors will take profits in the conditions of a promising increase in interest rates.
There is no doubt that the main beneficiary in the currency market amid the clear signals about the Fed's potential change in the monetary rate will be the strengthening of the US dollar.
All this scenario of the probable development of events will only come true if Powell clearly states the timing of the beginning of the reduction in the volume of repurchase of treasuries. It can be recalled that the bank repurchases securities for $ 60 billion a month. If he does not say anything about this at the press conference but continues to say that he expects a temporary surge in inflation, which will return to an acceptable level of 2%, then this will cause a weakening of the US dollar, a surge in demand for risky assets and a decline in government bond yields. In general, the result of the meeting may be the preservation of the usual market mood associated with the Fed's ultra-soft monetary rate.
From our point of view, we believe that Powell will try to do everything not to shake the market by giving an assurance not to expect a change in the regulator's monetary policy in the near future.
Forecast of the day:
The EUR/USD pair is consolidating in a narrow range in anticipation of the result of the Fed meeting and J. Powell's press conference. Any hints of promising changes in the monetary policy of the regulator will let the pair decline to the level of 1.2055. But if no signals follow, the pair may rush to 1.2195-1.2200 after breaking through the 1.2130 mark.
The USD/JPY is declining amid uncertainty over the outcome of the Fed's monetary policy meeting. But everything may change if Powell signals the timing of the beginning of the reduction in the volume of government bond repurchases. If this is the case, the pair will continue rising to 110.85, but if there's none, it will further decline to 109.20.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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