EUR/USD. US dollar and the Fed

The US dollar index continues to gradually update the lows, slowly going near the psychologically important level of 90.00. The downward dynamics has gained a pullback nature, which allows the EUR/USD bulls to open long positions, without being affected by euro's problems (tightening of quarantine in key EU countries, ECB's dovish rhetoric, deflation in the eurozone, etc.). In particular, euro's temporary weakening allows the buyers of the pair to enter purchases at a better price, thus indicating the strength of the upward trend. On the other hand, the US dollar still shows its vulnerability, especially before the results of the Fed's December meeting.

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A lot of diverse fundamental factors affect the US dollar, which has been used by the market as the main protective instrument for a long time. First, there is a political factor. The Electoral College put an end to the presidential race after weeks of uncertainty: Joe Biden is officially the 46th president of the United States.There are still ceremonial formalities, which will end on January 20 – Inauguration Day. Nevertheless, Mr. Biden can already be considered the elected head of state, especially amid the latest decisions of the Supreme Court, which rejected all claims in favor of Trump. Although he continues to say that the fight is not over, it is indeed over and even prominent party members of the head of the White House were forced to admit this fact. For example, Senate Majority Leader, Mitch McConnell, congratulated Biden yesterday on his victory. This political gesture is indicative. So, now that political tensions in the United States have significantly eased, the dollar's position was negatively affected.

Another factor is the COVID-19 pandemic, which is also unable to help the US dollar. Recent anti-records in the United States failed to provoke a surge in anti-risk sentiment in the currency market. Mass vaccination can be the primary reason, which started in the United States on Monday. In this regard, vaccination points have already been deployed in 150 hospitals across the country, and this number will increase to 600 by the end of the year. It is estimated that about 100 million Americans will be vaccinated by mid-spring. Considering such prospects, the USD weakened again, as the market simply ignores the current coronavirus anti-records.

Congress political battles about a new stimulus package for the US economy have also supported the US dollar for a long time (since May this year). However, the last bipartisan bill, which was introduced this Monday, will still be approved in the very near future. Both Republicans and Democrats supported its main provisions, although there is currently a struggle for certain points of the document. Yesterday, House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin discussed the bill by phone. Following the talks, the Democratic representative assured journalists that the remaining unresolved issues in the draft budget can be resolved quickly and easily.

Amid rising general optimism (including the above-mentioned), the safe dollar came under pressure again. Moreover, the Fed will continue to take an extremely soft position regardless of possible events in Congress.

According to general forecasts, the Fed will keep its base interest rate at 0-0.25% per annum today. At the same time, traders expect Fed's updated macroeconomic forecasts and comments on the prospects for the economy.

The main intrigue about the December meeting is related to the prospects of the incentive program, in particular, to what extent the regulator is going to implement QE and for how long? In addition, there have been rumors in the market recently that the Fed may shift its focus from short-term to long-term instruments of the debt market.

It is worth noting that there is no consensus regarding the Fed's possible actions in the market. Some experts believe that the Fed will take a wait-and-see position today in the light of the emerging progress in the negotiations on a new stimulus package of Congressmen. Meanwhile, other analysts (most of which) assume that the Fed will soften its policy by expanding the scope of the stimulus program and extending its effect. The recent macroeconomic reports speak in favor of the second scenario. For example, there was a sharp growth in the number of initial applications for unemployment benefits (853 thousand) last week. According to the latest Nonfarm, the number of people employed in the non-agricultural sector in November increased by only 245 thousand, although experts expected to see this indicator much higher – at almost half a million (480 thousand). The growth in the number of people employed in the manufacturing sector was also disappointing. It only rose by 27 thousand, instead of the expected growth of 53 thousand. November's unemployment rate also fell, but it refers to lagging economic indicators. Therefore, we should focus more on timely data.

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Slow and uncertain dynamics is also demonstrated by the US inflation. The general consumer price index in November rose to 0.2% in monthly terms, while it remained at the level of October in annual terms. As for the core inflation index, a similar trend can be observed – a slight (+ 0.2%) growth in monthly terms, and stagnation in annual terms.

Therefore, it is very likely that Jerome Powell will disappoint the dollar bulls today. The US dollar might also fall under a wave of sales again, taking into account the ongoing issue of the possible result of the Fed's December meeting.

The first upward target for the EUR/USD pair is the level of 1.2177 (two and a half year high reached last week). The main target is still the psychologically important level 1.2200, which also coincides with the upper Bollinger Bands line on the daily scale. It is too early to talk about more ambitious targets, since buyers of the pair need to at least consolidate in the area of the 22nd value.

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