The European currency soared against the US dollar after the Federal Reserve's monetary policy decision. However, it was not the decision itself that became the driver of growth, but the forecasts that were published immediately after the meeting. According to the data, the FOMC forecasts a faster acceleration in economic growth this year, but still expects to keep the benchmark interest rate at around zero until 2023. All this is happening at a time when financial markets are rapidly raising concerns about a possible increase in inflation. The Fed also said that it expects the economy to grow 6.5% this year, up from its previous December forecast of 4.2%. Inflation is expected to reach 2.4% in 2021, which is above the target, but in 2022 the indicator will again fall to the level of 2%. Let me remind you that the Fed agreed with this development in order to compensate for the inflationary losses that were observed during the coronavirus pandemic.
Economists continue to improve their forecasts, and many expect the economy to grow by as much as 7% in 2021 — the fastest annual growth since 1984. The central bank also said it would continue to buy $120 billion worth of bonds each month, which would reduce the cost of long-term borrowing. But as practice shows, this approach has not worked for a long time.
As I noted above: it was not the Fed's forecasts and monetary policy decision that drove the growth of risky assets against the US dollar. The Fed's report indicates that four representatives of the committee now expect a rate hike from zero starting in 2022, against one in December 2020. In addition, the number of FOMC members expecting a rate hike from zero in 2023 has increased from five in December to 7.
As the data showed, the Fed members voted unanimously to maintain the current policy. The statement said: the Fed will continue to maintain the current federal funds rate until the labor market reaches maximum employment, and inflation does not rise to 2% and does not exceed it for some time. If necessary, the Fed is ready to adjust monetary policy if there are risks that may hinder the achievement of the goals. Overall: overall financial conditions remain favorable, which is directly related to the measures taken to support the economy. Despite this, the sectors most affected by the pandemic are still weak, and further economic growth will depend heavily on the spread of the coronavirus and measures to combat it - including progress in vaccinating the US population.
The picture is complicated by the fact that last year the Fed announced a change in policy regarding the management of interest rates, saying that it plans to keep rates near zero "for some time" even after inflation exceeds the target level of 2%. This change means that the Fed is willing to put up with higher inflation than it has in the past, so investors who bet on an earlier increase in interest rates may ultimately be the losers.
Jerome Powell Press Conference
The demand for risky assets increased during Fed Chairman Jerome Powell's speech. He did not deny that the overall recovery in economic activity is due to unprecedented actions of fiscal and monetary policy, as well as the fact that the forecasts of Fed economists were significantly revised for the better. At the same time, Powell said: "Inflation remains below the target level of about 2%. Beyond the underlying effects, we may see upward pressure on prices as the economy continues to re-open after the Covid-19 crisis." At the same time, the head of the Federal Reserve continues to firmly believe that the one-time price hike that will occur this year will have only a temporary impact on inflation and will take much longer to achieve significant further progress in this direction.
As for the bond-buying program, Powell believes it is necessary to see real progress in achieving key goals before starting to talk about reducing the quantitative easing program. The Fed will make every effort to notify investors as early as possible about plans to scale back stimulus measures.
As for the labor market, Powell made it clear that there are still about 10 million people who need to return to work, and this will take time. "No matter how well the economy is doing, it will take time for unemployment to come down. It is extremely important that financial conditions remain favorable up to this point, " the head of the Federal Reserve said during a press conference.
As for the technical picture of the EURUSD pair, risky assets jumped immediately after the decisions were announced. On the way to build a new upward trend, there is a large resistance level of 1.1990, a breakthrough of which will surely return EURUSD to the highs in the area of 1.2045 and 1.2110. The euro will come under pressure, once the bears have taken control of support at 1.1940. This will result in removing a number of bullish stop orders and a stronger decline in the trading instrument in the area of 1.1885 and 1.1835.
