Traders focused more on the FOMC results instead of the weak 1st quarter US GDP that came out yesterday. Nonetheless, market changes were not that evident. A similar report will be published by the ECB this morning, from which decisions may lead to a EUR/USD rally, provided that new incentive measures will be taken.
Yesterday's report revealed the terrible consequence of the pandemic, which completely halted the economy and plunged down the US 1st quarter GDP by 4.8%. Such data indicate a looming recession, as 2nd quarter results are expected to be even worse. Measures taken to fight the outbreak dealt a heavy blow to economic conditions of the first quarter of this year. Similar economic decline was observed in the 4th quarter of 2008, during the onset of the global financial crisis.
The FOMC decisions yesterday aimed to help smooth out the economic damage, leaving interest rates unchanged between 0.00% and 0.25%, and discount rate at 0.25%. The central bank plans to continue using its full range of tools to support the US economy.
The sharp economic decline also did not slip the Fed chairman's eyes, as Jerome Powell, during his speech, noted the sharp drop in household spending and slowdown in economic activity, which threatens to continue falling at a serious pace in the 2nd quarter of this year. The current Fed asset purchases have largely helped markets recover in recent times, but direct fiscal support measures are needed to avoid more serious damage to the economy.
The Fed has already done a lot to support businesses and households, to prevent long-term damage to the economy. Its current decision to observe is most reasonable.
Full-scale lending to small and medium-sized businesses will begin in May, but not everyone will receive money. Insolvent companies will be screened out.
The Fed will not rush to curtail the current measures nor increase interest rates prematurely. Rates will remain near zero as long as inflation expectations are firmly restrained.
Meanwhile, an important ECB meeting will occur today, the results of which can significantly affect the markets. Adoption of new measures will lower euro demand even further, and growth problems in the EUR/USD pair will remain until the crisis continues. Consequences of which remain unknown.
At the ECB meeting, expansion of the asset repurchase program, as well as extension of the emergency asset purchase program may occur. Discussions on the creation of a national recovery fund may also be possible, from which its launch may delay the decision to expand the asset purchase program.
Eurozone countries are currently resorting to various fiscal stimulus, but only larger-scale measures will help the EU recover in the future. Larger medium-term rally in the European currency will not be supported by lifting the quarantine measures alone, as only the positive outlook of market participants relative to economic recovery after the pandemic will increase the demands of risky assets. The fiscal decisions of the government will make or break the bullish momentum of the euro.
The ECB's decisions to buy securities even with "junk" ratings, will provide assistance to countries such as Italy, Spain, Greece, etc., where debt obligations have the lowest investment rating of "BBB-".
A slowdown in inflation is observed. Yesterday's data on consumer prices in Germany disappointed traders, as the report revealed a 0.8% increase in the April index compared to the same period in 2019, higher than economists forecast of 0.6%. Compared to the previous month, the index grew by only 0.3%. Other inflation reports in the eurozone countries will be published today.
As for the technical picture of the EUR/USD pair, the Fed's decision yesterday did not affect the EUR/USD rate much. Only the break of the resistance level of 1.0890 will remove a number of stop orders and move the pair up to the highs of 1.0940 and 1.0990. If demand declines further because of the upcoming inflation data and the ECB decision, a break of the 1.0840 support will lead to a larger descent of risky assets in the region of lows of 1.0775 and 1.0725.
