Today, the Fed will announce the results of its April meeting. A lot of experts interviewed by Reuters and Bloomberg said that this meeting will just be passing: the regulator will maintain the status quo and will voice the already familiar rhetoric. Nevertheless, certain hawkish expectations are clearly present in the market, judging by the behavior of the US dollar index.
The focus of the market is on the quantitative easing program. In contrast to the "dovish" rhetoric of the Fed members, traders expect certain signals from the regulator about when the Fed may start cutting QE. During his previous speeches, Jerome Powell has repeatedly stated that the interest rate will be increased no earlier than 2023, while the stimulus program will be curtailed much earlier than this event. Previously, the market was focused on this plan for September next year, but recently, currency strategists of banking conglomerates have increasingly begun to say that QE will end in the spring of 2022. At the same time, the Fed Chairman promised to warn the markets in advance about the planned changes in the Fed's policy.
Such uncomplicated calculations and conclusions brought the issue of curtailing the quantitative easing program back on the agenda. The latest macroeconomic reports coming from the US only provoked "hawkish" expectations.
As an example, the US consumer confidence indicator was published yesterday. The release exceeded all expectations: it surged to 121 points against the forecasted growth of 113 points, thereby showing the best result since February last year. The indicator has been consistently growing "exponentially" for the past four months. It is worth noting that the latest inflation release also turned out to be much better than forecasts. Thus, the overall consumer price index on a monthly basis rose to the level of 0.6%, with a forecast at the level of 0.5%. A positive trend is recorded here for the third month in a row. In annual terms, the indicator rose to 2.6% (from the previous value of 1.7%), which is the strongest growth rate since September 2018. The core index also showed positive dynamics, rising to 1.6% yoy and 0.3% mom.
It can be seen that inflation is gaining impulse, exceeding the forecasted values.
The same applies in terms of the labor market. Even if we do not consider the last Nonfarm, which came out in the "green zone", and turn to more operational reports, it can be concluded that the labor market is recovering at an active pace. In particular, the weekly growth rate of initial applications for unemployment benefits came out at the level of 576 thousand during the previous week. This is the best result since March last year when the US economy had not yet fallen under the rink of the coronavirus crisis. The week before last, this indicator came out at the level of 586 thousand, that is, practically at the same level. These numbers indicate "healthy trends" in the US labor market.
In addition, the American consumer activity is also growing. Published during the second week of April, the data on the volume of retail trade in the US updated an almost annual high: the general indicator soared to 9.8%, which is the best result since May last year. And excluding car sales, this indicator also updated a multi-month high, rising to 8.4%, which is the best result since June last year.
It is clear that such unipolar macroeconomic reports suggest certain hawkish thoughts. In my opinion, the market quite reasonably "moved" the expected date of completion of QE – from autumn to spring 2022. However, this does not mean that the Fed will "reveal their cards" now, voicing the corresponding intentions. In this regard, we can agree with the experts of Goldman Sachs. According to them, the Federal Reserve will begin to hint at the curtailment of the stimulus program only in the second half of this year, while the reduction will actually begin in the spring of next year (approximately the rate of reduction will be $ 15 billion per meeting).
If we talk about today's meeting, the regulator is likely to repeat its phrase that "it intends to continue the purchase of assets in the same volumes until significant progress is made towards the goals of maximum employment and price stability". In view of strong macroeconomic reports, there is a high possibility that such a formulation will be negatively perceived by the market. If so, the US dollar will be under pressure again.
However, it is very risky to make trading decisions regarding dollar pairs following the results of today's Fed meeting. The fact is that another important event is expected today – the speech of the US president in Congress. Although the word "today" is not quite appropriate here, given the time zones: the American leader will begin to deliver a speech at 21:00 on the east coast of the United States.
Based on American media, the US President plans to sharply raise taxes for wealthy US citizens. If Congress approves Biden's proposal to raise the maximum income tax and capital gains tax rate, it would be the sharpest increase in taxes on investment income since the 1920s. However, this information is circulated in the media only in the form of rumors. If today or tomorrow, Biden announces a more acceptable version of tax reform in the context of hypothetical approval by both houses of Congress – the US dollar will grow in the entire market. But if he confirms the published rumors, the national currency will be under pressure again. The reaction of dollar pairs may be justified, so it is not advisable to make trade decisions only after the Fed's April meeting. In conclusion, the fundamental outlook for the dollar will be formed only by tomorrow morning.