EUR/USD. Fed's uncertainty, pessimism and "dovish" signals

The US dollar strengthened its position after the Fed's January meeting. This is despite Jerome Powell's quite pessimistic rhetoric, refuting rumors about an early curtailment of stimulus programs. Such a position should have increased the pressure on the US dollar, but USD bulls still remained above, as the market saw a surge in anti-risk sentiment. The general nervousness was primarily due to the decline in the stock market. The Fed Chairman only worsened the situation, although the main US stock indexes were going down even before the Fed meeting amid weak corporate reporting. If we combine these fundamental factors, the safe dollar is back in demand as investors have used it as a temporary safe haven.

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In general, dollar bulls have no reason to be optimistic. The head of the US regulator voiced out "dovish" signals yesterday, destroying investors' hope for the curtailment of incentives at the end of this year. Contrary to these rumors, Powell said that the regulator will maintain the current pace of bond repurchases ($120 billion per month) until there is a significant and sustained progress in meeting the employment and inflation target, while the recovery pace in economic activity and employment has markedly slowed down in recent months. The next statement indicates that the weakest dynamics of indicators were concentrated in those economic sectors that were most affected by the pandemic. Therefore, it is currently not suggested to talk about curtailing incentives, but on the contrary – about expanding incentive programs. In fact, Powell did not rule out such a possibility, saying that the Fed can do more to help the economy if necessary.

On the other hand, it is not necessary to discuss raising the interest rate: Jerome Powell reiterated during his press conference that it is too early for the Fed to discuss options and timelines for tightening monetary policy parameters. The US regulator assured the markets that the key rate will remain at the current level until the labor market reaches full employment and inflation rises to the 2% target or more. It can be recalled from the Fed's updated strategy that they are ready to "tolerate" inflation above the target level, without raising the interest rate. And given the current dynamics of inflation indicators, it is safe to say that the issue of rate growth will not be relevant for the next two years. By the way, Powell also voiced concern about this issue, complaining that weak demand and low oil prices are putting pressure on consumer inflation.

The results of the FRS meeting can be described in one word: "uncertainty." Jerome Powell has voiced this word too often, but in quite different contexts. For example, Fed's head expressed hope that the White House and Congress would agree on a package of anti-crisis measures when it came to Biden's recently presented "American Rescue Plan" in the amount of 1.9 trillion dollars. But at the same time, he admitted that the discussion process could drag on until this spring, while the US economy needed additional assistance. According to Powell, the economic uncertainty is compounded by new strains of COVID-19. He said that the trajectory of the economic recovery will largely depend not only on the coronavirus itself, but also on progress with vaccination. Here, it is worth recalling that recent studies show that the South African strain is more resistant to antibodies and poses a risk of re-infection. In addition, some scientists believe that the developed vaccines may be ineffective against the South African strain, although pharmacological giants have not yet refuted the alarming findings of South African virologists.

In any case, dollar bulls were able to defend the blow, despite Fed's such pessimistic and "dovish" statements. This is primarily due to the decline in the US stock market. Yesterday's trading ended lower amid negative dynamics from the sectors of consumer services, raw materials and healthcare. Jerome Powell only provoked it by announcing risks to the US economy. In particular, the S&P 500 index slipped by almost 3% towards the end of the US trading session. The Dow Jones Index was also down by 1.95% and the NASDAQ Composite Index dropped by 2.7%.In general, the number of securities that fell in price on the New York Stock Exchange was almost five times higher than the number that closed in the positive zone.

In view of this stock market decline, the dollar became the main protective asset once again. Initially, the national currency showed an unusual reaction to the "dovish" results of the Fed's January meeting. But this fundamental factor is unlikely to serve as a reason for the development of the dollar rally. As an example, the dollar bulls behaved fairly during yesterday's Asian session: the dollar index rose again in the already familiar range of 90.1-90.8 after the impulse growth.

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Technically, the euro/dollar pair continues its upside potential. The single currency came under pressure yesterday from the "dovish" comments of the ECB representative Klaas Knot, who allowed a reduction in the interest rate on deposits. Nevertheless, such fundamental factors are temporary only if it is not supported by other members of the Central Bank (which is unlikely, given the results of the last ECB meeting). Therefore, the euro can more than regain its lost positions in the near future – including in a pair with the US dollar.

Moreover, this pair on the daily chart is between the middle and upper lines of the Bollinger Bands indicator, which is located at the upper border of the Kumo cloud, between the Tenkan-sen and Kijun-sen lines. This indicates that there are no clear signals to open long and short positions. Buyers of the pair need to break through the middle Bollinger Bands line, which coincides with the Kijun-sen line (level of 1.2170). In this case, the EUR/USD bulls will confirm the strength of the upward movement, opening a path towards the 23rd figure. Sellers, in turn, need to break through the support level of 1.2040 (lower line of the Bollinger Bands on the same timeframe) to continue the downward trend.

In other words, the main currency pair is just waiting for information drivers. But considering several fundamental factors, buyers of EUR/USD in the medium term have more advantage (primarily due to the vulnerability of the greenback) for an upward breakthrough – at least to the level of 1.2170.

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