During the start of this week, experts' major shares drew attention to the dollar's long-term weakness, which continues to lose their positions before the Fed meeting. However, analysts are fairly optimistic about the current situation, believing that it will go back to normal in the near future.
Last night, the US currency disappointed the market once again, overcoming two-year lows. After starting from low positions, the US dollar failed to reach new peaks. ING Bank's currency strategists note that its collapse was facilitated by the growing risk appetite. The risk sentiment pushed down the dollar index, which declined to the lowest levels recorded in April 2018. They emphasized that investors' attention to risky assets increased amid news of the introduction of an effective vaccine against COVID-19, the expectation of another stimulus package in the US and hopes for a compromise in the Brexit negotiations.
As a result, the US currency was under pressure from general market optimism. The key role in this sentiment was the report regarding the beginning of COVID-19 vaccinations in the United States. At the same time, the market expects a positive decision on the package of financial support for the US economy, which increases the negative impact on the USD. It should be recalled that negotiations on incentive measures have been in progress since August this year, but nothing happened. However, the US Congress approved an interim budget on Friday, December 11, which will extend the current financing of the US economy until December 18.
Now, markets wait for the Fed's meeting next week, where they will primarily discuss the monetary policy (MP). Most experts are sure that it will remain unchanged, believing that the existing fiscal measures are sufficient to support the US economy. The issue of a possible curtailment of incentives will not be discussed, and the focus will be on the current changes in the regulator's economic forecasts.
According to the forecasts of most analysts, the Fed will keep its soft monetary policy unchanged and then raise the question of introducing additional fiscal support measures for the weakened national economy. This is facilitated by the latest statistical data on the labor market, which disappointed investors. Experts admit some expansion of the program of quantitative easing (QE), but the probability of this is insignificant. It is also possible to increase the volume of purchases of long-term bonds. However, analysts say that much depends on whether the Fed is satisfied with the existing rate on 10-year treasuries of 0.92%. If the regulator considers this level to be the most suitable for economic recovery, then changes are unlikely.
The mid-term planning range assumes that the US dollar will further decline, although experts say its pace will slightly slow down. The nearest target of the EUR/USD pair will be the level of 1.2200, which is possible in the event of a correction. Today, the EUR/USD pair is trading near the range of 1.2151-1.2153, trying not to focus on multi-day declines.
Experts believe that the US dollar can win back its losses in the near future, partially recovering the lost positions. This is enough to reach a balance in the EUR/USD pair. If such a scenario is implemented, it will allow the USD to gain stability and slow down the decline that continues towards the end of this year.
