The Fed will show the way to the greenback

Tomorrow, the United States Federal Reserve System (FRS) will announce its decision on monetary policy.

Recently, the US Central Bank made a dovish reversal, which eliminates the interest rate increase by the end of this year and announces its intention to complete the program to reduce its balance in September.

Greenback was depressed for a while until investors remembered that the United States was still at the forefront of the global economy and other global central banks were also following a dovish course.

It is expected that following the results of the next meeting, the Fed will leave the interest rate unchanged and the pause, which the regulator took earlier, will continue. However, the short-term dynamics of the dollar exchange rate will depend on what the Central Bank says and exactly how they will do it.

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In analyzing the tone of the statements of the regulator and the comments of Jerome Powell, one should pay attention to the following points, which can shed light on further steps of the Fed:

1. Employment

The American economy continues to actively create new jobs, approximately 200 thousand a month, which can only inspire, as well as unemployment at the level of 3.8%. Along with this, wages are rising. The rate of their annual growth a few months ago exceeded the level of 3% and confidently settled there.

However, now that strong employment rates are reflected in increased earnings, it may result that the pace of job creation may slow down.

What does the Fed think about this? Does he prefer to focus on the positive or negative aspects of the labor market?

It should be noted that market expectations regarding employment are quite high, so any signs of caution on the part of the Fed in this matter may put pressure on the US currency.

2. Inflation

In March, consumer spending in the United States grew for a maximum of more than nine and a half years but price pressure remained restrained, Moreover, one of the main inflation indicators (baseline PCE) showed the smallest increase over the past 14 months in annual terms.

How will the Fed respond to such results? The regulator most likely recognizes the fact of slowing inflation but the expectation of this has already been set by the market at prices.

If the Central Bank leaves this question without comment or does not express any concern on this matter, then this may provide support to the dollar.

3. Economic growth

Despite the fact that the latest release of US GDP gave a pleasant surprise, demonstrating an unexpected growth of 3.2% in the US economy in the first quarter, the market reacted rather coolly to this result. Firstly, the report showed weak inflation and secondly, the main driver of GDP growth was such an unstable factor as stocks.

How will the Fed comment on the latest figures? If the regulator decides that the glass is half full and once again marks the strength of the US economy, the dollar can strengthen. If the Central Bank retains a cautious attitude in this matter, then we should expect a weakening of the greenback.

"At the moment it is difficult to see something that could cause a greater dollar reversal," noted by currency strategists at Swedbank.

"What keeps moving greenback forward when the Fed behaves dovish, risk appetite is high, and the financial situation does not correspond to strong demand for USD? The answer, perhaps, lies in the fact that as long as the United States is ahead of other countries in terms of economic growth. The market will give preference to the US dollar", say by analysts at Saxo Bank.

"The events taking place in the global economy confirm the correctness of our" bullish "views on the American currency. However, it is not at all necessary that the growth of the dollar will turn out to be stable and aggressive," experts said.

The material has been provided by InstaForex Company - www.instaforex.com