No matter which way, but it seems that Donald Trump has achieved his goal. Long resisted by Jerome, Powell saw the need for a rate cut. Members of the Federal Reserve are closely watching the recent escalation of trade friction and will react if the economic situation in the country deteriorates, the head of the regulator said. Market participants perceived his words as a "dovish" signal. The S&P 500 jumped more than 2%, and the dollar has been in a state of weightlessness for the fifth day in a row. On Wednesday, the US currency continued its free fall relative to its six main competitors.
At the same time, a month ago, CME derivatives issued only a 32 percent probability of easing policy at the September FOMC meeting. Expectations soared to 86%, after the White House owner announced new tariffs against China and Mexico, and Powell dropped the standard mention that the bank was "patient" in terms of interest rates. The July figure jumped to 50% from 18.5% previously.
Market participants are waiting for a three-fold reduction in rates in the second half of the year. Analysts at Barclays expect that the central bank will twice soften the policy - in the autumn by 50 b.p. and in the winter at 25 b.p. A similar opinion is held in JP Morgan. It is worth noting that not so long ago, both banks did not predict any changes in monetary policy until the end of 2020.
If you turn to yesterday's comments of Powell, then you can be sure that he did not directly mention the rate cut, but only made it clear that the Fed is vigilant. In fact, he agitated the markets and reinforced the confidence of traders in easing the policy of the head of the Federal Reserve Bank of St. Louis, James Bullard. However, one should not forget that this official adheres to a "dovish" position; he had not hesitated to say that the Federal Reserve had gone too far with tightening policies in December. President of the Federal Reserve Bank of Dallas, Robert Kaplan wants to see whether some of the recent developments in the field of trade wars will be canceled, and his colleague from Chicago, Charles Evans, feels great at the current level of the federal funds rate. It is not excluded that the derivatives market runs ahead of the locomotive, since it firmly believes in easing the policy.
About the euro
As for the dynamics of the EUR/USD pair, it now looks better than it owes to the weakened dollar. The long-term strengthening of the euro can be expected after the cessation of trade friction. While Trump is going to war against everyone, you can safely buy the yen, the franc and gold. Moreover, the World Bank is constantly reducing forecasts for the growth of the global economy. Today, the estimate for the current year was worsened from 2.9% to 2.6%.
The main pair tested the resistance of $1.1265 and briefly rose slightly above the round mark of $1.13. It is unlikely that it will possibly develop an upward movement, because after the Fed the "dovish" motives will start to play around the European Central Bank. Euro positions may suffer significantly if Mario Draghi announces new incentive measures on Thursday.
The market, despite the deterioration of statistics, trade wars and consumption stagnation, does not expect any global changes in the area of monetary policy. Moreover, it is believed that the ECB will want to strengthen the position of the recently suffering euro.
Of particular interest will be the updated macroeconomic forecasts and the way Mario Draghi assesses the current state of the eurozone economy. At the next meetings of the regulator, the details of the new bank lending program (TLTRO) may be made public. Perhaps this will happen on Thursday.
