The US dollar continues its spring rally, although the growth momentum is gradually dying out on the eve of today's Fed meeting. The yield of 10-year government bonds returned under a 3-percent mark, but still remains at many-month highs. Dollar bulls are inspired by the current situation and are very optimistic about the summary of the May meeting of the American regulator. However, according to some experts, today it is necessary to exercise caution with the purchase of US currency. The Fed may not justify the "hawkish" expectations of traders.
It is worth noting that the probability of raising the rate at today's meeting of the Fed is 35%. Although in early spring, these chances were estimated at a minimum, within 5-10%. As you know, "appetite comes with eating." The strengthening of the labor market, the growth of the main inflation indicators, the ruthless rhetoric of the members of the Federal Reserve and the reduction of the probability of a trade war with China all these factors gradually increased the probability of a fourfold increase in the rate this year.
The June increase is not even discussed (the probability is 97%), as well as another round of rate increase in the fall. This scenario is already taken into account in prices, and it does not cause any special excitement. But rumors about accelerating the pace of tightening monetary policy push the dollar up. In other words, if the Fed today even allows such a probability, Greenback will continue its rally. But is such a scenario necessary for the regulator? After all, the strengthening of the national currency has the opposite, negative side (appreciation of exports, slowing inflation, etc.).
In addition, the Fed is certainly aware that too "hawkish" rhetoric will not only increase the value of the dollar, and will provoke further growth in the profitability of the Treasury. Such "shock therapy" will have an extremely negative impact on the stock market, which was in the negative area during the overcoming of the key three percent barrier. I doubt that the regulator intentionally aggravates this situation, thus causing abnormal volatility in the markets. Given the caution and prudence of the current head of the Fed, this scenario looks almost fantastic.
Another important nuance, the May meeting does not provide for the holding of a press conference by Jerome Powell. Therefore, the main focus of the market will be on the tone of the accompanying statement. According to the minutes of the March meeting, members of the Fed discussed the possibility of accelerating the rate of increase in the base interest rate. Some officials allowed the probability that the text of the statement of the Fed will be changed, since the monetary policy pursued will have a deterrent (rather than stimulating) character. Actually, this is the main intrigue of today's meeting. If the key wording of the accompanying statement is changed, the probability of a fourfold increase in the rate will increase in many respects. In this context, each word will have weight, and each phrase will be carefully analyzed by the market.
Macroeconomic statistics as a whole does not give reasons for pessimism. Published on Monday, the index of personal consumption (Core PCE Price Index) again showed a positive trend, 0.2% in monthly terms and 1.9%in annual terms. This indicator is the most important for the members of the Fed, so they are unlikely to focus their attention today on relatively weak inflation. The labor market also continues to please investors, despite the contradictory figures of the recent Nonfarm. According to preliminary forecasts, in April, the unemployment rate will still drop to four percent, amid rising employment in the non-agricultural sector. The so-called "Beige Book" of the Fed, published in mid-April, indicates an increase in average wages in most regions of the country.
In other words, the key indicators continue to gain momentum, so the Fed, on the one hand, has every reason to tighten its rhetoric. But on the other hand, the current situation on the stock market can affect the resolve of the American regulator. In my opinion, the Fed members will not change the key wording today, thus causing a strong volatility in the markets. It is more expedient to do this in June when Powell can personally explain the position of the Central Bank. In this case, the comments will be simply necessary so that the market correctly understands the stated intentions and conditions for their implementation.
On the technical side, the euro-dollar pair is in a downward movement. Bears EUR / USD yesterday tried to overcome the key level of support and go to the 19th figure. But this requires an information impulse, which yesterday was not, against the background of the May Day weekend. The "hawkish" results of the Fed meeting will hit this level and the price will go to the next resistance level of 1.1930 (the bottom line of the Bollinger Bands indicator on the weekly chart). But if the rhetoric of the accompanying statement disappoints traders with its restraint, the pair will return to the framework of 20 figures with the first northern target of 1.2160.
