The head of the Federal Reserve Bank of Atlanta, Raphael Bostic, put dollar bulls into a real knockout with his statement about the prospects of monetary policy. Considered a "hawk", Bostic stunned traders by admitting the likelihood of a reduction in interest rates. And although this year he does not have the right to vote at the Fed, his statement was the "last straw" that overwhelmed investors. After all, just a few hours before Bostic's speech, James Bullard expressed his position on this issue, who in 2019 gained his right to vote.
He said that the Fed's rates are now "at the right level", so their further increase "is not required". But traders reacted rather phlegmatically to this rhetoric. First, Bullard has been calling on the Federal Reserve since the summer of last year to suspend the process of tightening monetary policy, and secondly, his position is not shared by all his colleagues. However, Bostik's statement made us doubt that yesterday's "hawks" will retain their position in the future. In other words, there are reasonable doubts in the market that the regulator will continue to tighten the parameters of monetary policy in the current year.
It is worth recalling that the above-mentioned statements by the Fed representatives were preceded by many events that indicate a change in sentiment among the members of the central bank. First of all, we are talking about the December Fed meeting, where the slowdown in the rate hike became known. Later, Jerome Powell aggravated the situation of dollar bulls by saying that the Federal Reserve is "ready to show flexibility" in the matter of raising rates. And today, Bostik only added a negative puzzle, allowing the easing of monetary policy.
In my opinion, the probability of lowering the interest rate is currently minimal. In this case, we are dealing with the emotional reaction of the market – after all, for several years, the members of the central bank talked only about raising the rate: disputes mostly arose only about the pace of tightening. Therefore, when several members of the Fed voiced radically opposing intentions, the market could not stand aside, ignoring obvious trends.
In addition, the US currency was under pressure and other factors. The fact is that the market is seriously talking about the fact that the trade war between China and the United States is close to its end. Of course, the prerequisites for the development of such a scenario were earlier, since November last year, when the leaders agreed to find a compromise in the ongoing trade conflict. But given the repeated failed attempts of a similar nature, experts were in no hurry to draw optimistic conclusions. Even when China took the first practical steps towards the United States, many still doubted that the negotiation process would succeed.
In fact, it is too early to talk about this now – the parties completed only the first round of negotiations in a one-to-one mode, the results of which are still unknown. However, indirect signs suggest that a broad deal between countries can indeed be concluded in the near future. According to the representative of China, the parties will make a joint statement on the results of the dialogue "in the near future" (according to preliminary data – tomorrow morning). Journalists were asked to at least hint at the tone of the final communique, to which the official representative of the Ministry of Foreign Affairs of the PRC said that the positive results of the negotiations are favorable not only for China and the United States. "It will also be good news for the global economy," the official added.
In other words, the Chinese representative quite transparently hinted at the effectiveness of the negotiation process. It is also worth noting that Donald Trump also hinted at a "happy-end"– in his Twitter he said that "the negotiations are going very well." In addition, the American press reported that the president seriously intends to end the trade war to stimulate the US stock markets. Several insider sources in the White House confirmed this information to journalists.
Thus, today's events once again reminded the market of the vulnerability of the dollar. If the rhetoric of the minutes of the December Federal Reserve meeting is "dovish" in nature, the greenback will receive another blow, taking into account all previous statements of members of the US central bank. Do not forget about Friday's publication of the consumer price index in the United States. According to the general forecast, inflation will continue to show a negative trend, falling on a monthly basis in a negative area. If this forecast is confirmed, the "hawk wing" of the Federal Reserve may again decrease – this time at the expense of those members of the Fed who have the right to vote this year.
The material has been provided by InstaForex Company - www.instaforex.com