Today, the EUR/USD pair updated a two-month price low, declining to the bottom of the level of 1.12. The results of the Fed's January meeting were in favor of the US currency, despite the high level of expectations. At the same time, the hawkish mood of Jerome Powell exceeded all expectations. He surprised us with his decisiveness and straightforwardness, although he has completely opposite qualities. Nevertheless, the fact remains that the dollar bulls heard what they planned to hear, after which the US dollar began to gain momentum throughout the market. The US dollar index has updated a two-month high, and it is likely that it will go higher, given the Fed's clear signals.
Let's begin with the main thing: the US Fed is ready to raise the interest rate at every meeting. Jerome Powell did not rule out such a possibility, and therefore confirmed the implementation of the most hawkish scenario, which was voiced by experts before the January meeting. The head of the Fed noted that there is enough space for a rate hike without hurting the labor market. At the same time, Powell focused his attention on the strengths of the latest macroeconomic releases. In particular, he said that labor market conditions are in line with maximum employment, inflation remains noticeably above the Fed's long-term target (with high inflation now on a "broader base"), and the economy as a whole is showing powerful activity.
As for the date of the first round of the rate increase, there were also no unpleasant surprises. Jerome Powell made it clear that the regulator will begin tightening monetary policy at the March meeting. It also became known that the asset purchase program will also end in March, but at the very beginning of this month, that is, a few weeks earlier than previously planned.
It should be noted that the market initially actually ignored the Fed's final communique: the text of the accompanying statement provided only small support for the US currency. Traders took into account that the regulator had fulfilled the minimum program, but the question of further prospects remained. Overall, Jerome Powell could not push the US dollar down with his cautious statements or vague forecasts. But, contrary to the fears of many market participants, he was surprisingly straightforward and unambiguous in his statements.
However, several analysts said that Jerome Powell could be more hawkish. For example, he will allow a rate hike by 50 basis points at once at the March meeting. This scenario is also being discussed in the market, so the head of the Fed could "play along" with the hawks, thereby strengthening his resolute attitude. However, in my opinion, these claims of experts are unfounded. Firstly, Powell exceeded the program without excluding 6 or 7 rate hikes (there are seven planned Fed meetings left until the end of the year). Secondly, he did not rule out such a scenario (a 50-point rate hike at the March meeting). He noted that the Central Bank has not yet made any decisions on the timing and pace of rate increases. At the same time, Powell pointed out that the situation in the US economy is "significantly different" from what it was in 2015 (the current economy is much stronger than then). According to him, these differences will affect the pace of rate hikes. In other words, the issue of a 50-point increase in March is not closed at all – if January inflation surprises us again with record growth, this scenario will be very likely.
The only issue that was not fully disclosed yesterday is the issue of balance reduction. According to the content of the accompanying statement, the balance sheet reduction will begin after the start of the rate hike cycle, that is, after the March meeting. However, Jerome Powell noted in his comments that the regulator has no decisions yet to reduce the size of the balance sheet.
But in general, the Fed did not disappoint dollar bulls. We believe that the American regulator implemented the most "hawkish" scenario that was possible in the current conditions. If the February macroeconomic reports in the US do not disappoint as well (Inflation and Nonfarm data), we can talk about another dollar rally. To date, the US dollar has received significant support throughout the market. In the context of the EUR/USD pair, this means that the bears may decide to approach the area of 1.11 again in the near future.
Technically, the situation is as follows. On the daily chart, the EUR/USD pair is located between the middle and lower lines of the Bollinger Bands trend indicator, as well as under all the lines of the Ichimoku indicator (including the Kumo cloud), which formed a bearish "Line Parade" signal. The pair is located on the lower line of the Bollinger Bands indicator, currently testing the support level of 1.1210. If the EUR/USD bears consolidate below this target, they will open their way to the area of the 11th mark – at least to the level of 1.1186 (the one-and-a-half-year price low reached in November last year). The main downward target is the level of 1.1130 – this is the lower line of the Bollinger Bands indicator, but already on the weekly chart.
