According to the results of the next meeting on Wednesday, the Fed leadership managed to surprise the markets. It was expected that the position of the FOMC would soften somewhat in view of the latest macroeconomic data; however, even pigeon expectations were more than met. In the test of the accompanying statement, the key word turned out to be "patience", which should orient investors to a pause in the normalization of monetary policy, however, the profound changes in forecasts do not mean a pause, but a full-fledged reversal.
The forecast for GDP growth rates have been lowered for both 2019 and 2020. This means that Trump's desperate protectionism is not successful, American enterprises will not increase output, and the outcome of the trade war with China may not be as expected. China felt the weakness of the enemy and applies a suffocating technique, because it is the United States that needs the quickest possible completion of the negotiations, not China, and now the delay in the process is playing on China.
The unemployment rate forecast has worsened for 2019/21, which means admitting that the labor market is saturated and it has nowhere to grow. The weak employment report for February somewhat puzzled markets that were quick to explain the low level of new jobs as seasonal factors, but the Fed seems to think otherwise. If tax reform and trade negotiations will not give impetus to the growth of the American economy, the labor market cannot stay away.
As a result, the inflation forecast is lower. For a long time, it was believed that inflation was about to rise again, since good rates of growth in average wages would also lead to an increase in consumer activity. Obviously, the Fed believes otherwise - the forecast has been lowered, albeit slightly, but also for the next 3 years. The conclusion is obvious - the Fed assumes that the wage growth will be slow.
In the light of the foregoing, there is nothing surprising in the fact that the Fed does not plan a single rate increase in the current year, despite the fact that in December there were two such increases. One increase is planned for 2020, but, apparently, only in order not to bring down the markets - the deterioration of macroeconomic forecasts leaves the hawks no chance.
This is subject to adjustment; and there are plans to reduce balance. The marginal amount, which is not reinvested at repayment of treasury obligations, has been lowered from 30 to 15 billion. The structure of the balance will also change - as expected, part of the mortgage securities will be gradually replaced by treasury bonds, which means that there will be a recognition of direct budget financing by the Fed. Is it against the background of rising budget deficit and low activity of foreign investors? In the first place of China, such a move indirectly indicates a further slowdown in the inflow of foreign capital.
The markets have not yet fully realized that the turnaround of the Fed's position has taken place. Nordea Bank believes that markets react strangely - in his opinion, the weakening of the dollar is excessive. Danske Bank is confident that the US economy is in good shape, and the dollar will soon resume its growth, as the focus will shift to further easing by the ECB.
Facts suggest something else - the US economy may have passed the peak of growth.
The euro on Thursday will remain the favorite in the pair with the dollar, a break of the downtrend and consolidation above 1.1420 noticeably improve the technical picture for EURUSD. A successful attempt to update yesterday's high of 1.1448 and movement to 1.15 is likely to take place during the day.
The British pound is one of the few who did not take the opportunity to strengthen against the dollar at the end of Wednesday. The reason is both an increase in concerns about Theresa May's chances of achieving a postponement of Brexit at the opening of the EU summit today, and a worsening of the inflation rate. The base index unexpectedly dropped in February from 1.9% to 1.8%; production prices show weak growth; and housing prices are falling.
Today, the Bank of England will hold a regular meeting, no changes are expected. The pound will remain under pressure, the most likely scenario - a decline to the support area of 1.3080 / 95.The material has been provided by InstaForex Company - www.instaforex.com