The Federal Reserve left its monetary policy unchanged, and the US dollar failed to continue strengthening against a number of world currencies. However, there were only small pullbacks in the euro and the pound, which indicates that there are no willing buyers of risky assets. An important report on US GDP for the 4th quarter of this year will be released today. The Bank of England's decision on interest rates, which may surprise markets, will be released as well.
Going back to the Fed's decision yesterday on interest rates, which remained unchanged between 1.50% and 1.75%, it is necessary to note that there are some changes regarding rates on excess reserves and repos. For example, the Fed raised the IOER reserve rate to 1.6% from 1.55%, and raised the reverse REPO rate to 1.5% from 1.45%. Many experts expected such changes, but the more important point was the decision to keep such operations until April of this year, since they play the role of a safety net to maintain control over the main rates. The Fed also left the discount rate at 2.25%, saying it would continue buying treasury bonds at least through April.
The central bank also noted that in the future, the role of active REPO operations will become less important. However, this mechanism will have its own role after reaching sufficient levels of reserves. The Fed expects to reach a higher level of reserves in the region of $ 1.5 trillion.
During his speech at a press conference, Fed Chairman Jerome Powell said that the fundamental indicators that support household spending are strong, but company investments and exports remain weak, preserving the uncertainty factors that have recently been added to the coronavirus.
Powell also said that he believes the current monetary policy is appropriate to support growth, and if there are reasons for a significant revaluation of forecasts, the reaction will be immediate. As for the labor market, according to the head of the Federal Reserve, it continues to remain healthy, but a large supply of labor can restrain the growth of wages.
As I noted above, today, all attention will be focused on the growth of the US GDP for the 4th quarter of this year. It is expected to increase by 2.2%, after the 2.1% in the 3rd quarter. However, we should not hope that a good report will lead to a strengthening of the US dollar. This is because first, the downward trend in the EUR/USD pair has been observed for a whole month, and major players need to fix their profits somehow. Good GDP data can help in this, as it will lead to a surge in activity in the market of speculative players. Second, if the data is worse than economists' forecasts, then it is unlikely that it will be possible to exit the market at current prices. Thus, a slight upward movement of the euro will not yet be an evidence that the trend has changed.
From a technical point of view, everything depends on the 1.1000 level, where another false breakout was formed yesterday. An unsuccessful attempt to gain a foothold below this range will be an additional evidence in favor of the buyers of risky assets, and will signal the closing of long positions in the US dollar.
GBP/USD
Today is an important day for the British pound as recently, we have been thinking about whether the Bank of England will keep interest rates or lower them. The recent stabilization of UK economic data, especially in the service sector, which has returned to the 50-point area, may all restrain the regulator's decision, forcing it to keep the monetary policy unchanged. Improvements in business sentiment following the general early elections are also important in the medium term. Moreso, a number of experts also believe that at today's meeting, rates will remain unchanged, and until the state budget is published (March this year), where spending is expected to increase in connection with Brexit, the central bank is unlikely to change its policy.
Speaking of Brexit, yesterday, the European Parliament approved the Brexit agreement, which will allow UK to leave the European Union on Friday, in accordance with the results of the 2016 referendum. European parliamentarians approved the deal by an overwhelming majority of 621 to 49. The ratification of this agreement should take place today.
On the other hand, there are also those who believe that in the near future, the English regulator will actively reduce interest rates. The focus is on the likely deterioration of the economic situation in the UK at the beginning of this year, which will force the Bank of England to act ahead of the curve by considering a more serious rate cut. Let me remind you that the key interest rate is currently at 0.75%.
As for the technical picture of GBP/USD, the subject of dispute remains at the level of 1.3030, wherein the breakthrough of which will provide the bulls a clear advantage, opening up real prospects of returning and updating the highs in the area of 1.3065 and 1.3100. If the Bank of England surprises traders and goes ahead by lowering interest rates, we can catch the pound around the large levels of 1.2960 and 1.2910.
