The currency market took a pause ahead of the outcome of the US Fed's March meeting. The dollar index drifted at the borders of the 92nd mark, while the EUR/USD pair stayed below the level of 1.19, clearly intending to further fall. Generally, major dollar pairs showed weak volatility during the Asian session, and there is no doubt that this will continue until this evening due to the almost empty economic calendar within the day. The 10-year Treasury yield is still above 1.6%, but the upward trend has noticeably slowed down. In other words, the markets are peaceful before an intense period, which will certainly take place at the end of the day.
The essence of this month's meeting of the Fed is reduced to an absentee confrontation between US regulator's "dovish" position and the US markets "hawkish" position. The Fed regularly tries to convince investors that their optimistic prospects for a fast, V-shaped recovery of the US economy is exaggerated. Therefore, any early decisions from the Fed to curtail QE should not be expected.
It is noteworthy that all Mr. Powell's previous attempts to calm the strong beliefs of USD bulls have come to nothing. As an example, he assured market participants in one of his speeches that the regulator would continue to support the economy, allowing the US economy to "overheat" and inflation to rise above the 2% target. He also said that the actual unemployment level is now much higher than reported. According to his estimates, there are around 10 million able-bodied Americans who can not find a job. But, judging by the subsequent dynamics of the dollar index and the Treasury yield, traders were skeptical about the Fed's Chairman pessimism. They are confident that the US economy will recover in the second half of the year, and Americans' consumer activity will largely rise, due to the aid package from the state and the spending of accumulated funds. According to Bloomberg economists, the total amount of savings exceeds 1.5 trillion dollars. Such expectations have a fundamental basis – Goldman Sachs analysts believe that the volume of US GDP in 2021 will increase immediately by 8%.
Now, let's talk about the key point of today's expectations. All investors' attention will mostly be focused on the Fed's updated forecast on the growth of the US economy, the key rate and the main macroeconomic indicators. Based on the December forecasts, the US economy will grow this year by 4.2%, and then slow down to 3.2% the following year. Several analysts stated that the Fed may revise its previous forecast upward today. However, there are different options in terms of specific values – it ranges from 4.9% to 5.5%. In my opinion, any correctness on the scale of expectations will allow investors to conclude that their forecasts are not groundless, giving a chance to other assumptions on the Fed's possible actions to be considered. So, if the FRS actually revise its forecasts towards improvement, which is very likely, given the dynamics of key indicators, then the yield of treasuries will continue to rise again, supporting the US dollar.
However, the market may ignore Jerome Powell's dovish rhetoric, who will just reiterate its previous comments. It is unlikely that he will announce an increase in monetary stimulus due to the implementation of Biden's $ 1.9 trillion budget plan. In addition, there are rumors that the White House is ready to review tax policy, increasing the tax burden for wealthy citizens and large corporations. In view of such events, there is doubt that Powell will announce expanding QE.
In terms of inflation, the Fed Chairman can also maintain a somewhat neutral stance here. Earlier, FRS representatives said that they would not take any monetary policy measures in case of inflation growth. Powell also stated that the increase in price pressure will be temporary. Most likely, he will mention this again, but traders will ignore it.
Investors will certainly pay special attention to the statement. The optimistic wording of the Fed's accompanying statement will provide additional support to dollar bulls, especially if the regulator's economic forecasts are revised up.
Therefore, the results of the Fed's March meeting may be in favor of the US currency. It will be difficult for Jerome Powell to defend the "dovish" position, while ignoring the positive trends. At the same time, any optimistic rhetoric by the Central Bank head will be inevitably interpreted in favor of the national currency.
The technical outlook for the EUR/USD pair continues to be unchanged: the price is located between the middle and lower Bollinger Bands lines on the daily chart, and below the Kumo cloud and Tenkan-sen Kijun-sen lines of the same indator. All this indicates that the downward scenario remains the priority. The first downward target is set at 1.1840 (lower line of the Bollinger Bands indicator on the daily chart). If the results of today's Fed meeting favors the US dollar, the pair's bears will simply break through this target and move towards the main resistance level of 1.1800.
