The Fed is unlikely to inspire the dollar to re-rally

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The euro / dollar pair is on the verge of decisive trials. Tomorrow, the Fed will announce its verdict, and on Thursday, the European Central Bank. The market is preparing for turbulence, since the position of the Central Banks will determine the vector of movement of the above currencies in the long term. June meetings of the Central Bank have an intrigue. In Europe, the fate of QE will be decided, and in Washington, the regulator will discuss the prospects for monetary policy of the Fed.

Currency strategists are voicing different scenarios of tomorrow’s meeting of the American regulator. All of them agree that the Fed will raise the interest rate to two percent, for too long and persistently this has been hinted by members of the Fed over the past few months. But opinions about the future prospects of the Fed differ. Representatives of the hawk wing believe that the members of the regulator will take a tough stance, given the growth of key economic indicators. And although the Fed certainly will not announce an acceleration of the rate of interest rate increase, he can hint at this very transparently, changing the wording of the accompanying statement. So, one of the “hawkish” scenarios suggests that the Fed will exclude from the text of the statement the phrase that the rates will be kept “below the long-term neutral level for an indefinite period.” Such a signal will be perceived positively by traders, despite its disguise.

Let me remind you that at previous meetings, the members of the regulator allowed three or four rate increases this year. The base scenario is a triple increase, although the growth of the US economy does not exclude the second option. This issue will be key at tomorrow’s meeting. In my opinion, the Fed will not announce a fourfold increase in the rate and will not increase the median estimate.

First, if the unemployment rate drops to an 18-year low, the average hourly wage grows at a fairly low rate. This fact was repeatedly drawn to by Janet Yellen and Jerome Powell. In addition, the minutes of the last meeting made it clear that exceeding the target inflation rate is not a “panacea”, and will not lead to an automatic acceleration of rates of rate hikes. That is why today, the dollar actually ignored the corresponding release, according to which the consumer price index grew by 0.2% in monthly terms and up to 2.8% in annual terms. The positive dynamics are unlikely to affect the degree of resolution of the regulator’s members, given the position voiced earlier.

But the results of G7 can affect the Fed. The demarche of Donald Trump says that the trade wars this year will only gain momentum. In his turn, the head of the Federal Reserve said in March at a press conference that “the situation in US foreign trade has become one of the risk factors.” Since then, the situation in this matter has only worsened, despite all attempts at negotiations. The European Union and Canada are preparing a response to the introduction of American tariffs for steel and aluminum, and Trump, in turn, is preparing to introduce duties on foreign cars. At the G7 summit, German Chancellor Angela Merkel said that this step “will not be left without an answer.”

The Chinese “front” is also unchanged. At the summit of the Shanghai Cooperation Organization, the PRC leader sharply criticized Washington, saying that his policy is “shortsighted, selfish and insulating.” The sounded position speaks for itself. It is now clear that the US Treasury Secretary, who in spring announced the conclusion of the deal and the conclusion of the trade war, clearly hastened to conclude that the gap between the two countries is widening. The trade dispute with Canada also aggravated. With a high degree of probability, the US will leave the NAFTA, judging by Trump’s harsh statements about Justin Trudeau.

It is rather difficult to assess the consequences of introducing protective measures, especially when it comes to a “three front” trade war (EU, PRC, Canada). Therefore, increased uncertainty in the sphere of foreign trade will certainly affect the resolve of the Fed members. It is likely that Jerome Powell also focuses his attention on this issue. Such rhetoric will weaken the US currency, as the probability of a fourfold increase in the rate will significantly decrease.

Also, the Fed’s subject of discussion may be the form of the “yield curve” Treasuries, which becomes more “flat.” According to a number of experts, this indicator can cause concern among the regulator members, since the “smoothing” of the curve is an alarm signal, indicating a possible weakening of the country’s economy. This year, representatives of the Federal Reserve (in particular, Raphael Bostic) have already voiced concern about this.

Thus, the US Federal Reserve at the June meeting is unlikely to inspire the dollar to re-scale the rally. The fact of the rate increase is already taken into account in prices, while further prospects for monetary policy are rather vague. Most likely, Jerome Powell does not exclude the possibility of a four-fold increase in the rate, but at the same time he will point to the existing risks, which essentially level his “hawkish” attitude.

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

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