The EUR/USD pair soared to the highest levels since the beginning of November in the region of 1.1140 due to the results of the final US central bank meeting this year, which left the interest rate unchanged and announced plans not to raise it all year in 2020.
After three consecutive interest rate cuts, the regulator seems to have decided to stop.
Noting the strength of the US labor market, a steady increase in consumption and moderate economic growth in the country, the Federal Reserve made a unanimous decision for the first time since May and kept the cost of borrowing at 1.50% –1.75%.
At the same time, the Fed's plans for the next year have significantly changed. If in September nine of the seventeen FOMC members were in favor of raising the rate, now there are only four. The vast majority (thirteen people) vote for the rate to remain unchanged throughout 2020.
The central bank intends to return to toughening the policy in 2021: the majority - nine people - speak out for two or three rate hikes. At the same time, supporters of both a sharp tightening (one vote) and continuing soft politics (four people stand for an unchanged rate) remain in the minority.
"Before raising the rate, I would first like to see a substantial and steady increase in inflation. This is my personal opinion," said Fed Chairman Jerome Powell.
Given the stubborn reluctance of the personal consumption spending index to move to the Fed target of 2% and the regulator's fear that lowering inflation expectations will hinder actual inflation, we can conclude that the threshold for monetary tightening is much higher than for expansion, which is a bearish factor for the greenback.
The USD index updated its monthly low of around 97 points at the December FOMC meeting.
"The Fed has signaled that it has done its job and can leave: the adjustment within the cycle has taken place, and it is enough to keep inflation and economic growth within the framework of forecasts (1.9% and 2%, respectively)," said James Knightley, economist at ING.
The derivatives market continues to expect more from the US central bank and lays in the quotes for another federal funds rate cut by 0.25% in September 2020.
"The Fed remains hostage to the head of the White House, Donald Trump and his trade negotiations with China. If the deal breaks down and the United States introduces a new, most painful round of duties that will hit $155 billion in Chinese goods, both the markets and the economy will suffer, and the Fed will have to rush to help again, filling the fires with cheap money, " Knightley said.
"If Trump has problems before the election, he will not hesitate to make Powell a scapegoat, blaming him for all the problems of the economy. And although Trump's attacks alone are unlikely to turn the Fed off its track, a general deterioration in market sentiment is quite capable of doing this," he added.
In any case, the Fed has spoken, now it is the turn of the European Central Bank.
Most experts do not expect a new change in the central bank's world outlook in the field of monetary policy from ECB President Christine Lagarde.
Meanwhile, JP Morgan experts do not rule out a reduction in the deposit rate by 25 basis points and QE expansion from €20 billion to €40 billion per month in the foreseeable future.
BofA Merrill Lynch experts, in turn, believe that the derivatives market may begin to build expectations for a deposit rate increase to zero after the first Lagarde press conference. Currently, the quotes contain the probability of a rate cut in March 2020.
If Lagarde turns out to be a smaller dove than her predecessor Mario Draghi, then we can count on the continuation of the EUR/USD rally. However, the ECB has never welcomed the strengthening of the euro, so hints of a willingness to act if necessary are unlikely to disappear from the regulator's rhetoric somewhere.
Today, along with the ECB meeting, parliamentary elections will be held in the United Kingdom. The direction of the pound will depend on the behavior of EUR/USD. The sharp rise in the pound in the event of a confident victory for the Conservatives may lend a helping hand to the bulls of EUR/USD, allowing them to push the pair above 1.1200. At the same time, a "hung" parliament could provoke the pound's collapse, which will pull down the euro to the bottom.
The material has been provided by InstaForex Company - www.instaforex.com