The minutes published yesterday from the Federal Reserve's June meeting showed that the US central bank is still ready to be patient and wait for significant further progress in the economic recovery. This forced the dollar to retreat from three-month highs and made it possible for the EUR/USD pair to recover above 1.1800.
Given the recent weakness of reports on the business activity of the services sector and the dynamics of wages in the United States, it is not surprising that the central bank prefers to wait a little longer before acting.
However, it should be understood that the pace of recovery of the national economy is growing, as well as Americans' spending on tourism and other leisure activities. Sooner or later, macro statistics for the United States will improve, which will serve as an argument in favor of curtailing Quantitative Easing by the Fed.
Analysts interviewed recently by Reuters expect that the Fed will announce a strategy to reduce asset purchases in August or September. Although most analysts predict that the first reduction in the bond purchase program will take place at the beginning of next year, about a third of respondents believe that this will happen in the last quarter of this year.
"In general, the minutes from the June meeting of the Fed made it clear that the US central bank sees no need to hurry both with the curtailment of QE and with an increase in interest rates. Although the overall tone of the minutes was quite hawkish, it did not meet the expectations of the market, which expected more after the recent spot forecasts of the Fed. Therefore, the corresponding reaction to the release was the weakening of the dollar, " the strategists of The Goldman Sachs noted.
The Commonwealth Bank of Australia believes that the decline in the USD in response to the release of the minutes from the Fed's last meeting will not last long.
"The Fed remains one of the most active central banks and is likely to start discussing the reduction of QE at a policy meeting later this month. Therefore, we expect that the greenback will trade with an upward bias, " the bank's analysts said.
Recently, the US dollar's growth has surprised some market participants, as it occurs against the background of a decline in the yield of 10-year treasuries, which has already fallen to 1.25% from the March peaks around 1.77%.
"The fall in US yields complicates the picture for the dollar, but we see this mainly as a recalibration of inflation expectations after the Fed's hawkish turn at the June meeting, when politicians surprised the markets by signaling two rounds of interest rate hikes by the end of 2023," Westpac experts said.
They predict that the bulls will support the greenback in the short term when falling to 91.50-92.00 and may rise to 93.45, marking a new high since the beginning of November.
The increase in demand for US Treasury bonds, apparently, reflects increased concerns about the spread of a new strain of COVID-19 "Delta" in the world, which may negatively affect the pace of recovery of the global economy.
Amid a cautious market mood, the Australian dollar fell to a seven-month low on Thursday, and the yen is preparing to show the biggest daily growth this year.
The euro turned out to be one of the rare currencies that showed amazing resilience in the conditions of investors' actual rejection of risk.
The EUR/USD pair was able to gather strength and recover somewhat from the three-month lows marked the day before near 1.1780.
At the same time, the stability of the growth of the main currency pair is doubtful in light of the fact that the divergence in the rates of the US and European central banks will become broader in the coming months.
The European Central Bank just released the results of an 18-month review of the strategy.
The ECB has adjusted its medium-term inflation target for monetary policy, raising it to 2%.
Before that, the central bank's target indicator for inflation was a level just below 2%.
"The ECB's Governing Council believes that price stability is best maintained by setting itself an inflation target of 2% in the medium term. This target indicator is symmetric. This means that negative and positive deviations of inflation from the target indicator are equally undesirable, " follows from the message following the results of the revision of the monetary policy strategy of the central bank.
The ECB noted that the new inflation target may also imply a transition period when it will be moderately higher than the targeted level.
According to experts, the regulator's indication of the permissibility of exceeding inflation may be perceived by investors as an obligation to pursue an ultra-soft monetary policy for an even longer period.
The first meeting of the ECB Governing Council on monetary policy issues with the application of the new strategy is scheduled for July 22.
The next FOMC meeting is scheduled for July 27-28, and the annual Fed symposium will be held in Jackson Hole on August 26-28. More and more market participants believe that Federal Reserve Chairman Jerome Powell will raise the issue of curtailing bond purchases at one of these events.
"The EUR/USD pair closed below 1.1836-1.1824 (the Fibonacci correction level by 78.6%) on Wednesday. This indicates the possibility of a decline to the March lows in the area of 1.1704. We believe that attempts at growth will fade in the area of 1.1900-1.1960, so we will try to sell EUR/USD on growth. The bearish mood for the pair will remain as long as it is trading below the 200-day moving average at 1.2004," Commerzbank strategists noted.
