The results of the July meeting of the US Federal Reserve will be announced today. Perhaps this is the central event of the current week, especially since this meeting will most likely not be a "pass-through". Recent events in the US suggest that the country's economy will recover at a slower pace than previously expected, so the Fed could take a soft position, putting additional pressure on the dollar. But an alternative option is not excluded: the central bank can ignore many negative factors (for example, leaving out the continued growth in the number of COVID-19 cases in the US), maintaining a wait-and-see position until the fall. In any case, higher volatility is expected for the EUR/USD pair this evening, as well as for other dollar pairs. And it is quite difficult to predict the direction of the price – the fundamental background is contradictory and uncertain. Therefore, you should only make trading decisions on the pair based on today's results. Let me remind you that the text of the accompanying statement will be announced at 21:00 (GMT) and press conference by Fed Chairman Jerome Powell will start at 21:30 (it lasts roughly 30-40 minutes).
You should take note that the inconsistency of the fundamental background does not only lie in how the macroeconomic reports are diverse. For example, the number of people employed in the non-agricultural sector jumped by 4,800,000 in June. But at the same time, the indicator of wage growth turned out to be much worse than the forecast values. The level of average hourly wages on a monthly basis, firstly, remained in the negative area, and, secondly, collapsed to a multi-year low of -1.2%. The consumer confidence index also fell: this indicator dropped to 92.6 points in July. But the consumer price index showed a positive trend: the June CPI came out at the level of forecasts, reaching 0.6%. Core inflation (which does not include food and energy prices) last month was 1.2% on an annualized basis. This result turned out to be higher than the forecasts of most experts (who expected to see this indicator slightly lower - at around 1.1%). On a monthly basis, the core index rose to 0.2%, also beating analysts' forecasts.
It should also be recalled that the US economy slowed by 5% in the first quarter. As for the second quarter, experts' estimates differ. But absolutely all analysts agree that the results of the second quarter will be much worse than the first. According to the consensus forecast, US GDP will slow to -35%. This is a historical anti-record. The preliminary estimate will be published tomorrow, so the regulator's members will have to operate with their own calculations today.
As we can see, the macroeconomic reports are contradictory. This allows the controller to swing the pendulum both in one direction and in the other, deciding "the glass is half empty or half full".
In my opinion, the Fed will voice pessimistic rhetoric, taking a dovish position. Firstly, the coronavirus is still not letting go of the United States - the situation is only getting worse, and the number of cases is only greater. For example, 1,600 deaths of patients with COVID-19 were recorded over the past day in the United States. This is the highest daily increase in mortality in the country over the past two and a half months. The daily increase in infected people did not exceed the 25,000 mark during the Fed June meeting. Whereas in July this figure does not decrease (with rare exceptions) below the 60,000 mark. The alarm is raised by both doctors and scientists, who wrote an open letter to the White House demanding to tighten quarantine in the country.
Meanwhile, the bill on additional financial assistance to the US economy continues to be within the walls of Congress. Senators hacked the Democrats' $3 trillion initiative in May, considering the idea too costly. Now Congressmen are discussing the allocation of a trillion dollars. If Powell declares (directly or covertly) that this amount is not enough to "restart" the economy, the dollar will again be under strong pressure.
It is worth noting here that the Fed will probably leave the parameters of monetary policy unchanged at its July meeting. This fact is absolutely expected and will not make any impression on traders. The main focus will be on the text of the accompanying statement and Powell's rhetoric at the press conference.
If the Fed focuses its attention on positive trends in the labor market and inflation, while pointing to the need to reduce the amount of monetary stimulus in the foreseeable future, the dollar will receive quite firm support and strengthen throughout the market. But in my opinion, members of the Fed will not rush to such conclusions. On the contrary, most likely, the accompanying statement will contain a phrase about "potentially available incentive tools". In turn, Powell can talk about plans to introduce control of the bond yield curve at his press conference. In addition, the regulator will probably focus on the fact that low rates and incentive programs will continue to operate for a long time.
Such rhetoric will increase pressure on the dollar throughout the market, including EUR/USD. At the moment, buyers of EUR/USD are besieging the resistance level of 1.1750 (the lower border of the Kumo cloud on the monthly chart). Bulls have already stormed this price barrier several times, but could not gain a foothold higher. If the meeting ends according to the above scenario, the euro-dollar pair will not only overcome 1.1750, but also test the 18th figure. Otherwise, we will see a deep downward pullback to the first support level of 1.1580 (the Tenkan-sen line on the daily chart). Given the high degree of uncertainty, trading decisions on the pair should only be made based on the results of Powell's press conference.
