The euro-dollar pair tested the ninth figure yesterday - for the first time since last November. But having updated the low at 1.0998, the downward impulse went out, and the price returned to its previous positions. This suggests that, with all the support from the anti-risk sentiment, the US currency is still vulnerable - at least in the context of dominance over the euro. Traders understand that the panic regarding the spread of the deadly coronavirus will sooner or later disappear, after which the greenback will be left alone with conflicting macroeconomic statistics and ambiguous Fed intentions. The January meeting of the Federal Reserve may increase doubts about the "trustworthiness" of the dollar, and if defensive instruments begin to lose ground by that time, then the EUR/USD pair will be able to demonstrate significant corrective growth.
On the one hand, the January meeting can be called "passing": firstly, the market is 100% certain that the regulator will preserve the monetary policy parameters in its previous form, and secondly, updated forecasts will not be published at it. That is, the main intrigue will be in the tone of the accompanying statement and the rhetoric of the head of the Fed, who will traditionally hold a press conference following the meeting. There can be unexpected plot twists. Indeed, according to the results of the December meeting, the Fed took a long pause - after three rounds of rate cuts in 2019, Powell announced that he would maintain a wait-and-see attitude. According to some experts, the Fed will not change its policy throughout the current year (the factor of the US presidential election in November should also be taken into account). However, recent macroeconomic releases of a key nature have cast doubt on the intentions declared by the Fed.
Here it is worth recalling that at the December meeting, Powell voiced both positive and negative comments on the current situation. On the one hand, he noted the good dynamics of the US labor market, and also noted the growth of the American economy as a whole. On the other hand, he lamented that consumption growth had significantly slowed , while the decline in investment has noticeably increased, and the volume of investment by companies (as well as export volumes) was disappointing. The inflationary dynamics also worried Powell - he, in particular, recalled that while inflation is below the target two percent level, the regulator "will not even think" about raising the rate.
Unfortunately for dollar bulls, since the Fed's December meeting, macroeconomic reports in the US have been controversial and rather slurred. In particular, December inflation in almost all respects reached the forecast level, showing a slight slowdown. The general consumer price index rose to 2.3% in annual terms (instead of rising to 2.4%) and to 0.2% on a monthly basis. Core inflation, excluding food and energy prices, showed low growth in monthly terms (up to 0.1%) and remained at the same level (2.3%) in annual terms. Nothing catastrophic, but the very dynamics of growth leaves much to be desired. But the December Nonfarm was disappointing - primarily the inflation component. The average hourly wage was at around 0.1% on a monthly basis - this is the worst result since last September, when it fell to zero. In annual terms, the indicator rose by only 2.9% - this is the weakest growth rate since July 2018.
Thus, Powell has certain reasons for concern, although in my opinion, the latest releases are not able to "shift" the wait-and-see attitude towards easing monetary policy. According to the general expectation of the market, the Fed will not change anything today - neither in the context of specific actions, nor in the context of softening/tightening rhetoric. Moreover, almost 80% of traders are confident that this state of affairs will continue at least until June. Therefore, any deviation from the stated scenario (especially towards mitigation) will cause strong volatility for the EUR/USD pair.
In addition, members of the Fed are unlikely to ignore recent events related to the spread of the Chinese virus. Financial markets are showing a downward movement due to the possible consequences of the epidemic. The US regulator may voice concerns about this factor, but it is unlikely to change its views on the medium-term prospects of the US economy.
It is also worth noting that on the eve of the meeting, the US president has traditionally called on the Fed to lower the interest rate - "with a delay of two years." The market has ignored his call, as he will most likely be ignored by the US central bank's members. The White House has limited influence on the Fed, so Powell can afford not to hear the "wishes" of the head of state.
If the January meeting as a whole takes place within the framework of the expected scenario (maintaining the status quo + Powell's restrained comments), the dollar will again follow anti-risk sentiment in the market. Yesterday, the panic subsided somewhat amid reports that Hong Kong had created a vaccine against Chinese coronavirus. However, it will be possible to use it only after clinical trials (approximately in 2021), while the virus is actively spreading now. The number of cases has already reached 6053 people (which exceeds the statistics on SARS), and the number of deaths has reached 132 people. According to Chinese doctors, the peak in the spread of coronavirus 2019-nCoV will reach within the next ten days, after which the situation will stabilize. It can be assumed that until then defensive assets and the US dollar will be in high demand.
Thus, it is not advisable to open positions against the US currency at any outcome of the January meeting of the Fed. While there is panic in the markets, the usual fundamental factors do not work: if Powell unexpectedly voices the dovish theses, the EUR/USD pair reflexively jumps by 50-100 points, but if the anti-risk sentiment intensifies, this pair growth can be quickly offset.