The April FOMC meeting is undoubtedly the main event of this week.
The yield on long-term US Treasuries did not wait for the outcome of the next Fed meeting and interrupted the correction, which lasted for about a month. This allowed the US currency to come to its senses and pause in a record longest downtrend since December.
Greenback fans hoped that the latest strong US stats would force Fed Chairman Jerome Powell to hint at curtailing the asset repurchase program.
However, the head of the US Central Bank denied rumors of an imminent reduction in asset purchases, stating that the surge in inflation in the United States was temporary and noting that the employment level in the country was still far from the target. This was the go-ahead for the next dollar sale.
Another reason for the weakening of the greenback was the speech of US President Joe Biden in Congress.
The head of state presented a large-scale project to stimulate the population, called the “Plan for American Families”, which is part of a $ 4 trillion government spending project funded through tax reform.
The Fed’s monetary policy verdict and Joe Biden’s speech appealed to risky assets. The S&P 500 index renewed its all-time high, rising above 4200 points. The EUR / USD pair has peaked since late February near 1.2150, while the greenback sank to two-month lows around 90.50 points.
The “softness” of the Fed’s policy and the desire of the owner of the White House to increase government spending by another $ 1.8 trillion are fraught with the expansion of the double deficit of the United States (budget and trade balance), which is the eternal Achilles’ heel of the dollar.
“The main problem for the greenback is that the Fed is taking a cautious stance and is postponing the first steps to normalize monetary policy. Keeping interest rates low amid the improving situation in the US and in the global economy is a recipe for further weakening of the dollar, ”CBA strategists noted.
However, the downward impulse for the USD has not yet received a serious continuation, and the greenback was even able to partially regain its recent losses.
On Thursday, investors continued to assess the results of the April Fed meeting and the speech of US President Joe Biden.
According to the head of the Federal Reserve J. Powell, the situation in the American economy is still far from the goals of the regulator, and it will probably take some time to achieve significant progress in this direction.
At the same time, the FOMC raised its estimate of the economy in a published statement on monetary policy. In particular, the regulator said that indicators of economic activity and employment strengthened, while in March the Central Bank indicated that they had revived.
The Federal Reserve noted that the situation in the sectors of the economy most affected by
pandemic, has improved (instead of the previous wording “remains weak”). Besides
In addition, the Central Bank removed the adjective “essential” from the wording “risks remain
for forecasts “.
Regarding Joe Biden’s grand plan for taxes and expenses, market participants understand
that these proposals could undergo major changes in Congress. More
Moreover, it will be difficult for the plan to get the majority of votes on Capitol Hill,
since the Republicans, in principle,
opposed to raising taxes.
The greenback is also supported by the fact that the yield of 10-year Treasuries after yesterday’s drawdown on Thursday returned to growth, again rising above 1.65%. This is hardly surprising, given the expectations of accelerating inflation in the US and the Fed’s passive stance on this issue.
The rise in inflation is still not a problem for the US Central Bank, as it is caused by the effects of the low base.
The regulator is more concerned that millions of Americans are still out of work.
Unemployment, which peaked at 14.8% in April last year, has since dropped to 6%.
However, the head of the Fed J. Powell believes that the unemployment rate does not fully reflect the situation on the labor market, which has not yet returned to the level before the pandemic.
Experts note that the indicators for the United States continue to improve, which should further induce the Fed to change its tone on its supportive policy.
When the FOMC meets in June, employment in the United States could rise by another 2 million and inflation could rise above 2%.
There are seven weeks left until the next Fed meeting, and so far the regulator has made it clear that it is not going to change anything in its policy, leaving the American currency under pressure.
Wells Fargo specialists believe that the greenback will consolidate for some time, but then it will gradually lose ground in the medium term.
“Macro statistics for the US remains positive, and this trend should support the dollar, as well as renewed growth in Treasury yields. However, if the Fed does not back up this with monetary tightening for a long time, the USD will eventually start to lose ground, especially as the growth of foreign economies picks up. An improved global economy will play into the hands of risk-sensitive currencies, ”they said.
In response to the dovish decision of the FRS, the EUR / USD pair reached a two-month peak around 1.2150, but then corrected somewhat.
“In the first quarter, the dollar enjoyed a rise in US government bond yields amid a waterfall of stimulus measures. In the second quarter, the effect of these measures is likely to subside quickly, slowing the recovery of the American economy. At the same time, the EU should resume normal activity and benefit from the surge in demand for its export goods, caused again by stimulation and economic recovery in other countries. In this scenario, the EUR / USD pair may go up quite soon, ”Saxo Bank believes.
However, the main threat to the implementation of this scenario is the likelihood that the Fed will begin to tighten monetary policy earlier than the ECB.
According to ECB President Christine Lagarde, there is a light at the end of the tunnel as vaccination in the EU gains momentum, but it is too early to say that the dire economic consequences of the coronavirus crisis are over.
“The economy of the eurozone can confidently grow in the second half of the year, but the downside risks remain,” – said on Wednesday the head of the ECB.
As a reminder, following the April meeting, the regulator decided to maintain the status quo.
“The April meeting of the ECB became a passing one, as no signals were made following its results, and the regulator, apparently, moved the decision-making to June. The short-term outlook for the European economy looks bearish, while the medium-term one looks balanced. This indicates that in June the ECB may decide to reduce the purchase of assets in the framework of the anti-crisis program (PEPP), ”experts at Danske Bank say.
Analysts at Morgan Stanley, in turn, believe that the ECB may maintain higher than in the beginning of the year, the rate of asset repurchases in the third quarter.
“There is a risk that the allocation of funds to the EU states from the NextGenerationEU fund for post-crisis economic recovery will drag on until the fourth quarter. In addition, the ECB may wait until the vaccination target for 70% of the population is reached before cutting back on PEPP asset purchases, ”they said.
“An additional event that the ECB would like to leave behind until the volume of PEPP buybacks declines is the parliamentary elections in Germany,” Saxo Bank said.
On Wednesday, the EUR / USD pair broke through the key resistance at 1.2105 (61.8% Fibonacci retracement level relative to the fall in the first quarter). It is trading in the 1.2110-1.2150 range on Thursday, holding around nine-week highs.
A break above 1.2070 will open the way for the bulls to 1.2195 and 1.2240.
Initial support is at 1.2100. The pair will remain positive as long as it stays above 1.2050. A break below will indicate a reversal and signal a false upside breakout. In this case, the pair will return to 1.1990.