After the results of the Fed's November meeting, Jerome Powell started to curtail QE until December (contrary to rumors), but at the same time, did not stir up the hawkish mood, refuting the talk that the regulator may start raising interest rates next summer.
Such diplomacy of the Fed Chairman has failed traders of the EUR/USD pair – both buyers and sellers. The main currency pair surged to the level of 1.1616, reacting to his "dovish" rhetoric. However, the upward impulse faded in this price area, after which the bears took the lead. During today's Asian session, the pair returned to the area of the 15th mark, where it stayed yesterday. In general, traders just made a reversal and returned to the starting point.
But let's return to the results of this year's penultimate meeting. The central decision of the November meeting was the curtailment of QE. The Federal Reserve announced that it will reduce the volume of treasury bonds and mortgage securities repurchases by $ 15 billion (up to $ 105 billion) in mid-November, continuing to reduce the program in December. It was a widely expected, predicted and already accounted for in prices event. Therefore, market participants actually ignored the long-awaited announcement by many. However, there were also risks of implementing a different scenario: after the publication of failed data on the growth of the US economy in the third quarter, some experts assumed that the Fed would maintain a wait-and-see position until December. But these assumptions did not prevail in the market – by and large, traders were confident that the regulator would not abandon its intentions.
In any case, the Fed's future prospects were the subject of discussion. In particular, the currency strategists of the conglomerate Goldman Sachs published a forecast, and according to which the US Central Bank will raise the rate twice next year – in July and in November. They are also confident that the regulator will also raise the rate in 2023 and 2024, also twice a year. Not all experts agreed with this opinion, but most of them still allowed the option that the Fed's next step would be to raise the rate by 25 basis points after the completion of the QE curtailment (in July 2022).
Jerome Powell refuted these assumptions yesterday. He said that the decision to curtail the anti-crisis asset repurchase program is not a signal of an upcoming rate hike. The head of the Fed once again stated that the increase in inflation is temporary, and, therefore, the regulator will not fight it by "rapidly raising rates." At the same time, Powell evaded a direct answer to the question of when the regulator is going to start tightening the parameters of monetary policy, He replied that even after the Central Bank stops increasing the size of assets on its balance sheet, it will still continue to "maintain favorable financial conditions." A little later, he uttered another phrase in this context, saying that the Fed can be patient on the issue of rates.
In other words, Jerome Powell did not present any "hawkish surprises", although he fulfilled the minimum program by announcing the curtailment of QE. The initial reaction of EUR/USD traders was quite reasonable – hawkish expectations did not coincide with reality, which is why the pair shot up by almost 60 points.
The subsequent downward pullback also fits logically into the paradigm of the established relations of the dollar and the euro. Although Powell did not indulge the hawkish expectation of traders, the fact remains that the Fed has taken a course to normalize monetary policy, which will inevitably be followed (perhaps after a pause) by its tightening. In turn, the European Central Bank lags behind the Fed in this regard, while remaining committed to the accommodative policy. Just the other day, ECB Chairman Christine Lagarde, said that the medium-term forecast for inflation growth in the eurozone remains restrained, so the conditions for raising the rate will certainly not be met next year. In general, most representatives of the European Central Bank take a "dovish" position, stating that the curtailment of the PEPP program will not be the end of a soft policy.
As a result, the divergence of the ECB and Fed rates will continue to serve as an anchor for the EUR/USD pair. Any attempts of an upward correction will be stopped by bears: if not at the bottom, then when approaching the borders of the 17th figure. Let's pay attention to the daily chart of the pair – each intraday upward impulse ends with a downward pullback. The sellers of EUR/USD have their own problems – they cannot develop a downward movement, resting on the support level of 1.1530 (the lower line of the Bollinger Bands indicator on the D1 timeframe). But at the same time, they do not allow buyers to go above the level of 1.1680 (the upper line of the Bollinger Bands on the same timeframe). Apparently, the pair in the medium term will trade in the specified price range, starting from its borders. Therefore, with corrective bursts, it is advisable to open short positions with the main target of 1.1530.
