The minutes of the Fed's previous meeting published yesterday failed to provoke another dollar rally and did not support the US currency at all. Nevertheless, the EUR/USD pair managed to stop its decline, and is currently showing an upward correction. Although the price of this pair was rising throughout the market yesterday, the US dollar tested the level of 1.17, updating the three-month low at 1.1780. However, the Fed's "minutes" did not allow the pair to consolidate below the level of 1.1800, which disappointed the bears. The US dollar has become a victim again of traders' inflated expectations – given the "hawkish" results of the Fed's June meeting, many experts were almost sure that the minutes of this meeting would only strengthen the position of the US dollar. Therefore, the US dollar was "bought on rumors" for almost the entire Wednesday.
The document released yesterday was not dovish at all. Although the minutes did not focus on specifics and did not outline the time frame for curtailing QE (thereby disappointing dollar bulls), it confirmed the "hawkish" attitude of the regulator. The Federal Reserve only clarified that it does not want to rush to make appropriate decisions on tightening the parameters of monetary policy.
Based on the text of the minutes of the June meeting, the Fed members are determined to remain patient in starting the curtailment of the asset purchase program, as the uncertainty about the prospects for economic recovery somewhat rose. The members of the Committee decided to further analyze the incoming data "to assess the further progress of the Central Bank to its target levels." At the same time, the regulator acknowledged that general financial conditions improved noticeably from May to June, that is, for the period of time that has passed between the penultimate and last meetings. According to the Fed members, this indicates the stability of the economic recovery. In addition, the representatives of the Federal Reserve emphasized that inflation in the medium term will remain under control, and its record growth is due to temporary factors. Summing up the meeting, the members of the Committee promised to warn the markets in advance about the upcoming curtailment of QE.
Here, it is necessary to recall the events of almost a year ago. The Fed Chairman spoke about the revision of the strategy of the US Central Bank as part of an economic symposium in Jackson Hole in August 2020. It was a widely announced and equally widely anticipated event. The transition of the US Federal Reserve to targeting average inflation was called a "historic event". It is difficult to disagree with this statement since the resonant decision of the Fed is still connected to the US dollar. After all, the new strategy of the US Central Bank allows the regulator to keep base rates at the current record-low level for a longer time. Figuratively speaking, the Fed agreed last year to "tolerate" inflation at a 2% level, without tightening the parameters of monetary policy. Given the record growth of the consumer price index this year (and other inflation indicators), it can be assumed that the members of the US regulator foresaw such a scenario in August last year.
There were various scenarios among analysts at that time, including the worst ones for the US dollar. For example, some currency strategists assumed that the regulator would "tolerate" 3% inflation while keeping rates at a low level. Against the background of such assumptions, the US currency was under the strongest pressure – the EUR/USD pair declined from the 19th figure to the base of the 16th.
This fundamental factor has currently lost its relevance. At the last meeting, the Federal Reserve outlined the conditions under which it will raise the interest rate, while the point forecast allowed traders to count on a double rate increase in 2023. If we talk about the prospects for QE, then despite the Fed's "dovish" remarks, the market remains confident that the regulator will start reducing incentives this year. Yesterday, Goldman Sachs' analysts stated that according to their estimates, the Fed will announce the curtailment of QE, if not in November, then in December, at the final meeting this year. At the same time, the regulator will begin to voice out the corresponding hints at the next meetings – in August or September.
It is worth noting that the euro is now only at the beginning of the path that the dollar has already passed. The fact is that the European Central Bank completed a strategic review of its policy yesterday, and today, it will most likely announce its decision. Most experts believe that the regulator will raise the inflation target to 2%. Previously, it was determined by the Central Bank as slightly lower, but close to the two percent mark.
The ECB may also declare the inflation target "symmetrical", thereby allowing the possibility of inflation exceeding this level if necessary. It should be recalled that the latest data on Eurozone's CPI growth was released in the red zone: the general consumer price index slowed its growth, reaching 1.9% (after an increase to 2%), and the core index came out at 0.9% (after an increase to 1% in May).
In this case, ECB's new strategy, as well as the Fed's "hawkish" intentions in the medium term may exert significant pressure on the euro in general and on the EUR/USD pair in particular. From a technical point of view, any more or less large-scale growth of the pair should still be used to open short positions with the first target of 1.1806 (three-month price low) and the main target of 1.1750 ( lower line of the Bollinger Bands indicator on the daily chart).
