Should the US dollar expect surprises from Powell?
Many experts are thinking: does the Fed have any key advantage that can dramatically change the strategy for the current monetary policy and further dynamics of the US dollar? Most admit that a sharp reversal is unreasonable and so, the Fed’s next meeting will prove if this conclusion is right.
It should be recalled that the Fed meeting will be held tonight (December 16), from which they are expected to discuss the current monetary policy. Fed’s head, Mr. Powell, will hold a press conference later, where comments on the published theses will follow. Experts do not expect any news from the Fed, due to the fact that the current monetary policy (MPC) benefits the regulator, and so, any changes are not necessary. It is worth noting that the Fed currently adheres to a soft monetary policy, leading to the achievement of certain economic indicators. These indicators are now moving towards the target values.
The Fed’s focus is on key market indicators such as inflation and unemployment rate. Analysts say that they are moving in the right direction for the Fed, although they are still far from the target values. The regulator’s priority now is low interest rates and an expanded quantitative easing (QE) program. They will use this strategy until the US labor market recovers and inflation reaches 2%. At the moment, US inflation is gaining impulse, rising to 1.6%, which is above the summer rate, but below the 2% target. At the same time, unemployment is declining, although gradually. The specialists expect that the Fed will keep its key rate at 0-0.25% per annum and will present updated macroeconomic forecasts regarding the prospects for the US economy.
The current situation affects the dollar’s dynamics negatively. Last night, it significantly declined against world currencies, primarily against the euro. The US currency has been under pressure from different negative factors, and the main ones are positive news about vaccines against COVID-19 and expectations of additional fiscal stimulus in the United States.
According to experts, USD noticeably weakened due to hopes for a large-scale cash infusion of $ 1.4 trillion. This gave the Euro currency a chance to take the lead and it really did. Its growth was facilitated by the increased global demand for risky assets. Yesterday, the EUR managed to hold gains, trading near the two and a half year highs. On Wednesday morning, December 16, the EUR/USD pair was moving around the range of 1.2162-1.2163, trying to break more heights, but failed.
ING currency strategist, Petr Krpata believes that the euro began to grow after the ECB meeting due to pressure on the US dollar. The analyst is confident that this trend in the EUR/USD pair will continue in the near future.
Experts think it is highly doubtful that the Fed will follow the example of the ECB, that is, expanding the monetary stimulus program. It should be recalled that the European regulator recently increased the volume of asset purchases by € 500 billion due to the growth of COVID-19 cases and the downturn in business activity in the eurozone. According to analysts, the expansion of the QE program will affect the markets and fail to support the economy. The US government, which should decide on the stimulus package, is the only one who can solve the issue of declining business activity. Today, J. Powell will recall this by focusing on immediate economic goals.
Any surprises from the Fed is not expected by the markets, but if the Chairman of the regulator will announce something beyond expectations, then a different development of events is likely. In the case of such an option, it is possible to drop the yields of US Treasury bonds, increase the prices of precious metals and further weaken the US dollar. However, this is unlikely, and the market is only preparing for a small increase in volatility.
The material has been provided by InstaForex Company – www.instaforex.com