According to the results of the December FOMC meeting, EUR/USD updated its semi-annual high (1.0696), but could not keep its positions. During the Asian session on Thursday, the price fell and began to slowly slide to the base of the 6th figure. Despite the strong volatility, the pair actually remained at the same level, making a small circle to the limits of the 7th price level.
We can say that the U.S. central bank did not meet the hopes of the bulls, but did not provide a clear support to the bears either. The Federal Reserve voiced both hawkish and dovish messages.
On the one hand, the Fed slowed the pace of interest rate hikes, raising it by 50 points at the end of the December meeting. On the other hand, the median forecast for the final rate was revised upward: it rose to 5.1%. Do recall that at the end of the September meeting, the point forecast was also revised to 4.6% (i.e., here we see an uptrend).
The pair sharply fell as a response to the accompanying statement, falling to the base of the 6th figure. But Fed Chairman Jerome Powell's stance during the press conference was not exactly in favor of the greenback.
First of all, he said that the US economy might not avoid a recession next year amid tightening monetary policy. Powell acknowledged that the Fed's tight policy is making it hard for consumers, while noting that "it would be even more difficult if we didn't do anything". Nevertheless, he emphasized the side effects of the Fed's hawkish policies, thereby weighing on the dollar.
Secondly, Powell said that the members of the Fed may revise the forecast of the final rate downward, "if we continue to see weak inflation data." According to the head of the Fed, the current monetary policy is still "not restrictive enough," but the effects of its tightening "are yet to be felt" by the American economy. And in this context, he voiced, in my opinion, a key phrase, stating that the pace of rate hikes is no longer decisive, and the decision to raise the rate "will be made at each specific meeting, based on incoming data."
In other words, at this point we cannot talk about a final stop at 5.1%, despite the fact that the median forecast for the final rate has been revised upward. Now everything will depend on the dynamics of key macroeconomic indicators, primarily inflation.
In general, based on the results of the December meeting, one can draw an unambiguous conclusion about Powell's less aggressive stance. Previously, he methodically (since the August economic symposium in Jackson Hole) defended his position, which was that the central bank should curb inflation, while accepting the presence of side effects. He repeatedly said that Americans would have to put up with slower economic growth because "that is the sad price of lower inflation".
But now that the side effects of the Fed's aggressive stance have begun to show, and inflation has gradually (but consistently) begun to slow, Powell has eased his stance. He tied the pace of monetary tightening to the pace of accelerating/slowing inflation. In fact, there is no predetermined trajectory for a rate hike - the relevant decisions will be made from meeting to meeting. The pace will depend on incoming economic data. Powell has repeatedly said that "what we need to see is clear and convincing evidence that inflation pressures are abating and prices are coming down,": now it has started to receive that evidence (slowing CPI, PCE index). Consequently, the central bank has an opportunity in the context of slowing the pace of monetary policy tightening to 25 points or revising the forecast of the final rate downward.
As we can see, the bulls were not pleased with his stance. Immediately after the Fed meeting, the US dollar index collapsed to its weakest level in six months and the yield of 10-year US Treasuries fell below 3.5%. But on Thursday morning, the dollar index was showing an uptrend and the euro was down to the base of the sixth figure.
The fact is that the Fed has actually left the situation in limbo. On the one hand, it set a target and raised the bar to 5.1%, on the other hand, it tied the dovish scenario to inflation. And if the consumer price index stagnates for the foreseeable future (not to mention renewed growth), the Fed will automatically revert to the baseline scenario, which implies an increase to at least 5.1%.
Thus, the outcome of the December meeting is contradictory. On Wednesday, these results were interpreted against the greenback. But in the end the dollar stayed afloat: now everything depends on the dynamics of US inflation growth.
