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Fed showed teeth: selling EUR/USD and GBP/USD pairs

Although the final decision of the Fed to leave the key interest rate unchanged was expected, the resolution of the bank, as well as, the speech of the head, Jerome Powell, somewhat differed from the general views of market participants.

We have previously indicated that investors were determined that the bank could lower interest rates in the second half of this year, after a sharp turnaround in the monetary policy of the American regulator at the beginning of this year, when the Fed and Jerome Powell signaled a pause in raising interest rates. At the March meeting, a statement by Mr. Governor and some Fed members sounded a note of such a probability. In any case, the market interpreted their words in this way, therefore, they expected more specifics from the May meeting.

In our opinion, Powell clearly shed light on the likely actions of the Central Bank in this regard. And in his commentary, he not only made it clear that the rates could be lowered, but he noted with complete clarity and frankness that he was waiting for renewed growth of inflationary pressure, believing that a decrease in inflation in the first quarter was a temporary phenomenon. He also positively described the situation on the labor market, saying that he still remains strong and that he does not see his overheating. In general, he also spoke positively about the general economic situation in the country.

His statement was a cold shower for those market players who have already felt that the Fed has surrendered and gone completely in the wake of not only the market but the start of a new quantitative easing program as President Donald Trump, who wants not only lower interest rates. In fact, we can say that the winter retreat of the regulator was a tactical maneuver and nothing more. It can even be assumed that the bank will probably continue the process of reducing its balance sheet but at the same time, liquidity in the banking system will be supported by repos. This topic is now under discussion, Powell said.

Not only did the foreign exchange market, as well as the American stock market, fully respond to the somewhat unexpected statement of the head of the Federal Reserve by the growth of the dollar and the weakening of stock indices, but the market of the American state dollar also showed an increase in yield of treasuries.

Assessing this state of affairs, we believe that if the data of the business activity index in the non-manufacturing sector of the United States published today and the data on employment in the States do not disappoint, this will support the dollar exchange rate in the foreign exchange markets.

Forecast of the day:

The EUR/USD pair is likely to continue to decline on strong economic statistics from the United States. We consider it possible to sell it after crossing the level of 1.1160 with a probable local target of 1.1100.

The GBP/USD pair is turning down. We consider it possible to sell it after crossing the level of 1.3000 with a probable local target of 1.2925 against the background of positive American data.

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