Following the results of the Fed meeting, the euro/dollar pair reached the four-week low of 1.1685. However, it failed to approach the annual low of 1.1664. In general, Fed policymakers did not spook bulls but also did not exceed their expectations. Yesterday, some analysts anticipated the hawkish surprise, but in vain. The regulator did exactly what many traders had expected. The outcome of the meeting is sure to benefit the greenback, especially after the Fed downgraded its outlook for many key macroeconomic indicators. Despite the unexpectedly weak Nonfarm Payrolls report for August and slowdown in inflation, the Fed still intends to normalize monetary policy, although it is not in a hurry to take appropriate actions.
"We also discussed the appropriate pace of tapering asset purchases once economic conditions satisfy the criterion laid out in the Committee's guidance. While no decisions were made, participants generally view that, so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate," Powell said in the press conference. So, if inflation and employment reach target levels, the central bank may slow down bond purchases. The Fed also hinted that the tapering may start in November. So, according to the head of the Federal Reserve, the text of the final communique was drawn up in such a way as to convey to the markets a message that the necessary conditions for starting the curtailment of the program can be met by the next meeting. As you know, the next (penultimate this year) meeting will be held in November. Powell outlined that in the FOMC statement, market participants may get clues that the regulator may start the reduction of QE by the next meeting, which is scheduled for November.
However, traders should also pay attention to the FOMC dot plot.
In June, the dot plot projections showed that that 13 of the 18 members were in favor of "at least one rate increase by the end of 2023". Interestingly, according to the results of the March meeting, only 7 officials spoke in favor of such a scenario. Bulls were elevated by the fact that 11 of the 18 members predicted at least two rate hikes by the end of 2023. At the same time, 7 of the 18 members of the Fed in June envisaged a rate hike next year (in March, four members of the regulator admitted such a likelihood). In September, the regulator expressed a more hawkish tone on monetary policy
So, according to the dot plot forecast published yesterday, 9 members expect that the first rate increase will take place in 2022, and the other nine believe that it may happen in 2023. At the same time, the regulator admits that it will raise the federal funds rate three times in 2023.
Thus, despite the ongoing wave of coronavirus, the weak Nonfarm Payrolls report and contradictory inflation data, the US regulator is gradually switching to a more hawkish stance on the key rate. Apart from that, Jerome Powell outlined for the first time a specific date for the QE taper. The Fed is likely to reduce asset purchases in November. Although ahead of the September meeting, many experts thought that it might occur in December. The US dollar is likely to take advantage of this situation.
Traders' reaction to the meeting results was muted despite the fact that the Fed made several significant statements. After climbing to 93.50, the US dollar started declining. Apparently, it was unable to rise higher as traders resorted to the 'buy on rumors, sell on facts approach'. Ahead of the meeting, the US currency was growing across the board. However, after the announcement of the results, it slipped. Investors also took notice of Jerome Powell's remarks about the economic risks associated with coronavirus. The economic recovery still depends on the epidemiological situation. He also stressed that the current level of interest rates will remain until the economy hits full employment and inflation stays within the target level of 2% for some time. Taking into account the latest reports on the labor market and inflation, Powell's comments give food for thought.
For what it is worth, the greenback gained momentum after the Fed's meeting. Meanwhile, the euro/dollar pair is likely to rise as well amid the strengthening of the US currency. Currently, the euro is weaker than the US dollar due to uncertainty over the ECB's stance on monetary policy. The different stance of the Fed and the ECB will continue to exert pressure on EUR/USD, pushing the pair down. The current growth of the pair is likely to be a correction after almost a week of decline.
In the medium term, it is recommended to open short positions if the pair declines as a part of a correction. Technical indicators show that the pair is located between the middle and lower lines of the Bollinger Bands indicator, as well as blow the Ichimoku indicator, which gives a bearish signal. Bears pushed the quotes to the lower line of the Bollinger Bands (1.1680) yesterday but refrained to test this level. If this level is broken, the pair may resume the downward movement. The next support levels are 1.1664 (the annual low) and 1.1580 (the lower line of the Bollinger Bands, which coincides with the lower border of the Kumo Cloud on the weekly chart).
