Fed and ECB prepare for recession

As follows from the minutes of the FOMC meeting of March 20, published on Wednesday, the normalization policy has been suspended due to a variety of external and internal reasons. The Fed notes a slowdown in the US economy as well as a decline in consumer activity due to the weakening effect of tax incentives and a slowdown in the global economy. At the same time, the Fed assumes that the slowdown will be delayed and will be significant not only in 2019 but also in the next few years.

In fact, the Fed's position means an obvious expectation of a recession and therefore, maintaining interest rates unchanged this year, which looks like a reasonable and obvious step.

Central to the discussion was the question of balance. The current reduction program will be completed in September and apparently, the overall balance will remain unchanged for some time. There is also a possibility that the Fed will get rid of mortgage-backed securities in its portfolio, which could lead to an increase in mortgage rates.


Markets regard the outcome of the Fed meeting in two ways. In the short term, the decision to abandon the growth rates in the current year is a step towards improving financial conditions and therefore will lead to an increase in demand for risky assets. In the long term, the markets received a clear signal. You need to prepare for a protracted recession that could begin this year.

The first signs that fears of a recession are not in vain were revealed on Wednesday as the core inflation rose by 0.1% in March against the forecast of 0.2%. Annually, the growth slowed from 2.1% to 2.0%. The US economy will slow down and the short-term euphoria of dovish Fed decisions will end fairly quickly.

EUR / USD pair

The ECB left interest rates unchanged as predicted at its regular meeting on April 10 and confirmed its intention to keep them at least until the end of 2019.

Like the Fed, the ECB is beginning to prepare for a recession. The probability of lowering rates has risen and inflation expectations have worsened. It was confirmed that the details of the next TLTRO refinancing program will be disclosed at one of the next meetings which will most likely be in June. There are already assumptions that TLTRO loans will occur at negative rates.

The press conference of Mario Draghi ultimately produced a negative effect, despite attempts to maintain an optimistic tone. Draghi admitted that the impact of negative factors was longer than expected and the slow growth will continue this year.


The negative reaction of the markets to Draghi's performance turned out to be short-lived. They did not see any strong arguments in favor of further reducing the euro and therefore, EUR/USD will remain near current levels with a probability to increase. The euro may rise to 1.13 during the day and try to go above the limit of the range. There is low growth potential but there are even fewer reasons for the decline in support for 1.1240.

GBP / USD pair

The EU leaders at an extraordinary summit agreed to postpone the exit of the UK from the EU until October 31. The threat of an uncontrollable Brexit has been eliminated. Additional negotiations will be held on the exit conditions in June. The next season of the Escape from the EU saga is completed. Now, Britain will have to take part in the elections to the European Parliament, which will be held in May. The internal political struggle is unlikely to weaken, but the foreign exchange market can take a breath.

Meanwhile, the pound received support after the publication on Wednesday of macroeconomic data. Industrial production in February has unexpectedly increased instead of the predicted decline. Also, the GDP grew, therefore, we can now expect that quarterly growth to be higher than expected.


NIESR forecasts a growth of 0.4% in the first quarter and 0.3% in the second, provided that current trends continue. The latest data for March turned out to be better than expected and the UK economy was a little further from the threat of recession than expected quite recently.

The pound completely lost direction, as it focused on political, rather than economic factors. Today, the pair will most likely continue to trade in the range with the resistance level at 1.3122 and 1.3196 and the support at 1.2976. Volatility is unlikely to be high.

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