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28.09.2018 12:52 AM
Trump the Fed is not a decree

The bulls of the EUR/USD pair were defeated yesterday: the Fed's attitude remained "hawkish", despite the August slowdown in inflation, as well as the escalation of the trade war between the US and China. The position of the US President, who criticized the tightening of monetary policy, was also ignored by the US central bank. The Fed's spot forecasts for rates remained unchanged, and the long-term forecast rose to three percent, although at the July meeting it was 2.875%. All this suggests that the Fed is not going to slow down in the process of normalization of monetary policy.

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It is noteworthy that after the publication of the accompanying statement, the price jumped to the borders of the 18th figure. The fact is that the regulator removed from the text the phrase that "the policy of the Fed remains stimulating". This step was misinterpreted by the market - most traders decided that the Fed approached the level of a neutral rate, followed by a long pause. These findings were offset by the published forecast of the US central bank, as well as the subsequent rhetoric of Powell.

However, this incident suggests that when approaching the real level of the neutral rate, the dollar will lose its foothold, especially against the background of the actions of other central banks of the leading countries of the world (except Japanese), which will only begin to fully tighten the parameters of monetary policy. Judging by the results of yesterday's meeting, the neutral level is in the level of 3.25% - 3.5%. If the regulator maintains the stated pace of rate hike (December-March-July-September), the Fed will approach the level mentioned above in a year. And the closer the "X-hour", the stronger the pressure on the US currency. The euro/dollar pair is no exception here, as the ECB will only start a cycle of rate hikes in the autumn of next year, which will affect the dynamics of the exchange rate.

However, these are all quite long-term prospects - and yet the greenback is again trying to regain its position: the dollar index returned to the area of 94 points, and the EUR/USD pair is at the borders of the 16th figure. Jerome Powell during his press conference tried to be neutral in his assessments, but the overall result of his rhetoric can be called optimistic. He noted that the US economy is growing at an impressive pace, in particular, by reducing the tax burden and increasing costs.

As for the prospects of monetary policy, the head of the Fed said that the members of the US central bank are "balanced", trying to maintain the optimal pace of normalization of monetary policy. He admitted that the Fed can accelerate this rate under one condition - if inflation is ahead of forecast values. But Powell immediately stressed that at the moment he is "not observing this at all." Perhaps this was his only comment on the slowdown in inflation in August - such dynamics, he said, restrains the Fed from raising the pace of rate hikes.

If we talk about a possible slowdown in the rate of increase, such a scenario is also possible, but only in two cases – with a sharp drop in financial markets and/or an unexpected slowdown in the country's economy. If the first case is rather unlikely (more than two years have passed since the collapse of the Shanghai stock exchange), the second scenario is more real. According to some experts, in the third quarter, US GDP will not be able to repeat the impressive results of the second quarter (4.2%). According to them, economic growth will slow to three percent, reflecting the effects of the US-China trade conflict and weather factors. Such a scenario is unlikely to lead to a revision of the rate of hike, but in a sense will play a deterrent role (if the issue of accelerating the rate of increase is discussed).

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In general, Jerome Powell made it clear that the regulator is on the planned course. Any temporary setbacks in macroeconomic indicators, nor the statements of the US President, nor the foreign trade conflicts will not prevent the Fed to increase the interest rate to the neutral level, and and even exceeding it if necessary (Powell admitted such a possibility). Only events of a truly large-scale, tendentious or force-majeure nature will be able to stop this process for some time.

There was an impression that the Fed intends to reach the neutral level as soon as possible (observing the necessary intervals, of course) and take a wait-and-see position. That is why the members of the US central bank for the most part do not focus on the temporary "failures" of macroeconomic indicators: for example, 12 of the 16 members of the Committee said that they support the fourth rate hike this year – up to 2.5%. This suggests that the pessimistic scenarios of experts regarding the September meeting were not confirmed, and the Fed, in turn, confirmed its commitment to the previously announced scenario, thus supporting the dollar.

Now about the situation directly on the EUR/USD pair. Here, political passions in Italy also put additional pressure on the currency pair. Discussion of Italy's budget for next year should begin in Rome today. The euro reacts sharply to Italian news, which are usually negative: in particular, the country's finance minister said that he could resign because of unresolved disagreements around this document. A clearer picture on the Italian issue will be clear in the afternoon – but the uncertainty factor puts significant pressure on the European currency.

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From a technical point of view, the situation has not changed: the bulls of the pair still have a chance to keep the initiative if the price is above the Bollinger Bands average line on the daily chart (that is, above 1.1660). If the pair falls below this level, then the main target of the downward movement will be the price of 1.1575 - this is the upper limit of the Kumo cloud at D1.

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