The results of yesterday's FOMC meeting and Fed Chairman Jerome Powell's testimony at the press conference did not surprise investors much. Importantly, the Fed has improved its economic outlook. In March, the regulator noticed that the economic indicators just went up. However, in yesterday's report, they strengthened significantly. Besides, the negative impact of the pandemic on the most vulnerable sectors decreased. Hence, the FOMC decided not to make amendments to monetary policy.
More pressing questions were raised at Powell's press conference. He gave quite comprehensive answers. When asked if it was time to talk about reducing QE, Powell said that the time had not yet come. Answering the question, if the Committee sees any danger from a possible surge pandemic, Powell noted they would adhere to the criteria that the virus, if not defeated, would at least stay under control.
The main topic was inflation expectations. Powell was asked what would happen if inflation expectations rose even before full employment was achieved. Powell replied that this scenario looked unlikely. He said that full employment would be achieved before inflation rises above the target level. However, even if it happens, nothing bad will take place. Fed officials will take into account other factors. However, he did not explain which ones.
So, monthly purchases of QE will continue at the same volume of $120 billion. The yield of the Treasury Inflation-Protected Securities seems to start rising, breaking out of the one-and-a-half-month consolidation zone.
The US Treasuries are likely to advance as well, pushing the US dollar higher. The only question is when it will begin, while the markets react sluggishly, waiting, perhaps, for confirmation of the growth of inflation expectations.
Maybe at the end of the week, there will be more clarity about the prospects for inflation growth. Today, investors are awaiting the release of GDP data for the 1st quarter, including price dynamics and personal spending. On Friday, data on US personal income and spending for March will be unveiled. When analyzing the results of the FOMC meeting, a great number of banks started betting on the bullish bias of the US dollar in the long term. The outstripping economic growth historically always leads to the rise of the US dollar albeit with some delay.
On Thursday, the US dollar is still weak. It is unlikely to gain momentum in the coming days. The commodity currencies are adding gains amid a decline in risk appetite. The yen may face strong selling pressure.
EURUSD
The IFO and Gfk indexes showed a deterioration in Germany's economic prospects, indicating that quarantine restrictions negatively affect consumer confidence.
The economic outlook and earnings expectations have worsened significantly. The pace of the recovery of the euro zone's largest economy will be slower than in the US due to new lockdown restrictions.
Inflation forecasts for the current year are significantly lowered. Today, the European Commission will present data on the business climate. Economists predict a decline. On Friday, data on consumer inflation for March will be released. Analysts expect the figure to be unchanged since February.
Thus, inflation expectations in the euro area and the US will differ significantly. This will adversely affect the euro and may trigger a rally of the US dollar. So far, the euro has managed to consolidate above 1.21. The next target is 1.2240. Technical analysis indicates the upward momentum but it is unclear for how long it will last due to changes in the fundamental analysis.
GBPUSD
Yesterday, the European Parliament has voted overwhelmingly in favour of the post-Brexit trade deal between Britain and the European Union but called Brexit a historic mistake. The pound sterling reached with growth. Versus the greenback, its prospects look better than the euro. So, EURGBP may drop soon.
The movement to 1.40 and above is still relevant. The target level goal is the February high of 1.4202.
