EUR / USD: Fed chief did a disservice to the pair

Yesterday, the euro/dollar bulls attempted to consolidate above the key resistance level of 1.1240, which was the middle line of the Bollinger Bands indicator on the daily chart that would allow them to rise to the 13th figure and above in the future. After the announcement of the results of the May meeting of the Fed, the pair impulsively reached the mark of 1.1265, thereby updating the two-week high.

But Jerome Powell's subsequent comments were in favor of the US currency as the head of the Fed smoothed over the "sharp edges" of the accompanying statement, refuting market rumors about the regulator's further steps towards easing monetary policy. As a result, the EUR/USD pair is now at the level of yesterday's discovery at the base of the 12th figure. Both upward and downward impulsive price movements did not receive their continuation. Neither the bulls nor the EUR/USD bears found support from the majority of traders and the pair actually remained in their previous positions, awaiting the next fundamental driver.

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Despite Jerome Powell's confident rhetoric about the prospects for the American economy, the tone of the accompanying statement was worried. The regulator expectedly drew attention to the reduction of key inflation indicators. In fact, it would be surprising if the Fed ignored this trend. Indeed, over the past few weeks, almost all inflation indicators went out in the "red zone" worse than expected. In general and especially the core inflation, there was negative dynamics, the price index of GDP updated the three-year minimum and the main index of expenditures on personal consumption fell to zero for the first time since March last year. Plus, a weak wage growth rate amid a general strengthening of the labor market. The negative picture is clearly systemic, therefore, the regulator in its final communique expressed particular concern about this fact. According to Fed members, the slowdown in inflation is not caused only by lower energy prices (especially considering the dynamics of the oil market). So in this case, the Fed is not dealing with a temporary seasonal phenomenon but with a steady trend.

At the same time, the regulator did not specify in the text of the accompanying statement whether he is considering the option of reducing the rate among other scenarios or not. The Fed just repeated the phrase about the need to "be patient", without defining any time guidelines.

The "dovish" rhetoric of the accompanying statement put strong pressure on the dollar, after which, the greenback fell in price across the entire market. The situation hastened to fix Jerome Powell. At his traditional press conference, he stated that he currently does not see compelling reasons for changing the base interest rate both upward and downward. He acknowledged that core inflation declined "quite unexpectedly", but this dynamic may be due to "temporary factors." It is worth noting that in this case, Powell's rhetoric goes against the rhetoric of the accompanying statement. Fed members do not consider the current trend as a "temporary phenomenon," indicating an alarming trend. Therefore, the position of the head of the Federal Reserve in this context looks quite surprising.

Nevertheless, the market heeded the words of Powell and the dollar made up the lost positions in a matter of minutes to the basket of major currencies. In general, the position of the Fed chairman was "cautiously optimistic". He announced the strengthening of the US economy with the GDP growth in the first quarter exceeded forecasts, noting separately the strengthening of the labor market, amid growing Nonfarm and reducing unemployment. At the same time, he started a slowdown in consumer spending and business investment but global financial conditions have softened, according to Powell. Factors including the progress in trade negotiations between Washington and Beijing, a decrease in the likelihood of a "tough" Brexit, an increase in the key indicators of China and the EU, reduce the likelihood of a slowdown in the global economy.

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In other words, the head of the Fed is quite optimistic about the prospects for global growth in general and the US economy in particular. However, he did not express particular concern about the slowdown in inflation, associating this trend with the influence of temporal factors. Such a peace-loving tone supported the dollar.

In my opinion, the optimism of dollar bulls is premature. Of course, greenback received a powerful reason for its recovery - at least in the short term. But if inflationary indicators continue to show negative dynamics, Powell will no longer be able to "brush off" this problem, explaining the current dynamics by temporary factors. In this context, Nonfarm will play an important role, namely the dynamics of wage growth. If this indicator disappoints investors, the dollar will again be under considerable pressure.

In technical terms, EUR/USD buyers still need to gain a foothold above the resistance level of 1.1240. At this price point, the Bollinger Bands midline was not only drawn on the daily chart but also the Tenkan-sen and Kijun-sen lines. If the bulls overcome this target, they can count on a return to the area of the 13th figure. Otherwise, the bears will again return the price to the base of the 11th level.

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