So, the Fed will raise the rate in December this year and plans to return to this issue three times during 2018. This is the main message of yesterday's meeting of the Federal Reserve. Contrary to doubts, the American regulator took a rather "hawkish" stance, virtually ignoring all the weak points of the country's economic growth. Moreover, despite the rise in unemployment and low values Nonfarms, the Fed officials noted the "improvement of the labor market", shifting the emphasis to a record-low unemployment rate (even with its increase).
Separately, it is worth mentioning about the assessment of inflationary dynamics. The regulator found that while inflation will be "slightly below" the target two-percent level, but in the medium term the indicator will still reach acceptable levels. In this situation, traders were particularly surprised by the fact that the reduction of inflation forecasts for the next year, the Fed has kept the planned pace of tightening monetary policy.
Powerful hurricanes also did not impress the head of the Fed. In her opinion, multibillion-dollar losses will not affect the growth of the US GDP, especially since the country has already experienced similar climatic catastrophe without fatal consequences for the economy. It is indicative in this sense that the forecast of GDP growth looks from 2.2% to 2.4%.
Announcing the rate increase, the Fed also did not forget about the reduction of assets on its balance sheet. This program will begin its work from next month. Here, the main intrigue was when exactly the Fed will start implementing this issue. Because the balance normalization scheme was announced in the beginning of summer, and the regulator has kept it in the same form: a reduction in reinvestment of six billion dollars a month due to treasury bonds and four billion due to mortgage-backed securities. These figures will increase every quarter until they reach 30 and 20 billion, respectively. Target level of balance is not yet known, but is estimated to representatives of the Federal Reserve, by 2020 it is expected to decline by 1.5-2 trillion.
In general, the members of the Fed exceeded the general market expectations, taking a more rigid position. Against this background, the US dollar was somewhat stronger, but a full-scale offensive of dollar bulls did not happen. Among the main pairs, the most sensitive were USD/JPY and AUD/USD, but by and large not because of the appreciation of the dollar. The yen was under additional pressure from the Bank of Japan, the target yield of 10-year Japanese government bonds remained at zero level, and apparently, will remain at this level at least until the spring of 2018. In turn, the Australian weakened after the pessimistic comments of the head of the RBA Philip Lowe.
The euro-dollar pair first collapsed into the 18th figure, reflecting the general reaction of the market to the results of the September meeting. But, contrary to broad expectations, the southern movement has not received further development. Moreover, today the bulls of the pair are making a "daring" attempt at growth, returning the price to the framework of the 19th figure. Why is this happening?
If we compare this situation to 2015, we will see that then for 11 months the dollar grew more expensive only on some rumors and expectations of a rate hike. The Fed discussed this issue all year and postponed it and only in December decided on this step. Neither much nor little, for 11 months of 2015, the pair EUR/USD lost 1.5 thousand points. In the current conditions, the market is almost sure (the chances are almost 70%) that the rate will be raised after two months, and this will not stop the tightening of monetary conditions. However, today the pair lost less than 100 points, some of which have already "returned".
In my opinion, this is explained by the notorious "dissolution" monetary policies of the ECB and the Fed. Two years ago, the American regulator was the only Central Bank among the world's leading CBR, which announced the normalization of monetary policy. At the moment, the situation is fundamentally different: the Bank of Canada has already raised the stake twice, the Bank of England is going to do it before the end of this year, and the ECB is seriously thinking about winding down the stimulus program.
Actually, these "thoughts" of the European Central Bank have voiced again the other day by board member Sabine Lautenschlager. And if Mario Draghi, as usual, expresses his opinion with veiled phrases, then his colleague spoke directly for reducing bond purchases early next year. And if we proceed from the general rhetoric of the last ECB meeting, this timeline is the most accurate.
Thus, the market is living by expectations of a gradual tightening of monetary policy not only by the Fed but also by the ECB. Only the December rate increase of the Fed is already largely reflected in current prices, but the ECB's policy is intriguing with its uncertainty. That is why, in my opinion, the fall of EUR/USD was limited.
Technically, for a pair of bulls, it is important to keep the pair above 1.1835 (the lower line of the Bollinger Bands indicator on the daily chart). And if the price exceeds and consolidates above 1.1945, the pair will be between the middle and top lines of the Bollinger Bands indicator, and the Ichimoku Kinko Hyo indicator will generate a "Line Parade" signal. This combination will indicate the resumption of the northern trend with the original target of 1.2035, this is the top line of the Bollinger Bands indicator on D1.
