The US Fed did not surprise but did not disappoint either. The American regulator has fulfilled the "minimum program", fully meeting the expectations of most experts. The December meeting was hawkish, laying the foundation for the US dollar's further strengthening. However, Jerome Powell's rhetoric did not allow dollar bulls to fully express themselves. The US dollar index immediately returned to its previous positions after a short-term rise to 96.80, reflecting the cautious attitude of traders to the US currency.
The EUR/USD pair behaved in a similar way. It impulsively declined to the base of the 12th figure, reversed, and settled again in the area of the 13th mark. Apparently, traders decided to return to the neutral zone and still take in the information received, despite its hawkish color.
On the one hand, the results of the December meeting were supposed to strengthen the position of the US dollar. First, the Fed has increased the pace of QE reduction – from $15 billion to $30 billion per month. Now, the asset purchase program will end in March next year and not in June, as previously expected.
Second, dollar bulls were pleased with the dot chart of individual forecasts of Fed members. The updated chart exceeded even the wildest expectations of experts. All members of the Committee predict the first rate hike next year. Let me remind you that according to the results of the September meeting, there were half as many "hawks" – 9 representatives of the Fed. Moreover, ten officials expect three rounds of promotion within the next year. The regulator is ready to keep a similar rate of increase in 2023 (most Fed representatives also predicted three increases). Five of the 18 members of the Committee believe that the rate will be at the level of 2.5% or higher than this target by the end of 2024. The most "hawkish" forecast (which, however, was voiced by only three officials) provides for an increase in the rate in 2023 to 2.25%.
In other words, the Fed is really determined to act decisively, reacting to the record growth of inflation in the United States. At the moment, the market is fully confident that the first rate hike will take place in May next year. While an earlier increase (at the April meeting) is also not excluded – the probability of this scenario is 75%.
Despite the impressive results of the last Fed meeting this year, the EUR/USD pair is now pretending as if nothing had happened. After a short-term downward impulse, the price returned to its previous positions and froze within a narrow range. What is the reason for such an unusual reaction?
In my opinion, there are two reasons: Jerome Powell and Omicron. The rhetoric of the Fed Chairman was traditionally cautious and uncertain. Firstly, he said that the latest data on the US labor market was "disappointing". It can be recalled that the number of people employed in the non-agricultural sector in November increased by only 210 thousand with a growth forecast of 530 thousand. According to Powell, the employment data were not good. At the same time, he admitted that the Fed will probably have to raise the interest rate even before the level of full employment is reached. However, he added that the dynamics of the labor market causes concern.
According to several experts, a new wave of weakening of the US economy at the beginning of next year will allow the Central Bank to delay the start of tightening. In this case, the labor market will be affected. If Nonfarm data continue to disappoint, the aggressive pace of rate hikes will be a big question.
Secondly, Jerome Powell said that the Fed has not yet developed a common position on the duration of the pause (or the need for it in principle) between the end of QE and the first interest rate hike. Meanwhile, the market has already established the opinion that the regulator will decide on the first increase in April next year, after which it will maintain the quarterly pace of tightening monetary policy for the next nine quarters. The doubts expressed by Powell, who allowed "pauses", put pressure on the US currency.
On another note, it is necessary to note the "Omicron factor". The head of the Fed said that the increase in the cases of coronavirus in recent weeks coincided with the appearance of the Omicron variant, which has become a risk for further forecasts. According to Powell, it is currently impossible to draw an unambiguous conclusion about the impact of the new strain of COVID-19 on inflation and unemployment. But the very fact of recent trends is worrying.
A lot of experts also said that the United States will face an unprecedented sharp increase in the cases of coronavirus in the near future. According to the latest data, Omicron is four times more contagious than the Delta strain. At the same time, it is also less dangerous, so it is more important to study statistics on the severity of the disease and the level of mortality.
The market heard what it planned to hear yesterday, after which it calmly recorded a profit on the EUR/USD pair. The risks voiced by Powell only increased the pressure on the US dollar. In addition, the pair's traders are now waiting for the announcement of the results of the ECB meeting. According to a number of analysts, the European Central Bank may also tighten its rhetoric, although in this case, we are not talking about an early curtailment of incentives or a rate hike. And yet, before this event, market participants do not risk playing against the euro.
All this suggests that it is most expedient to take a wait-and-see attitude right now. In fact, the US dollar received a reason for its strengthening yesterday but did not use it, due to the above reasons. At the same time, there are no arguments for its weakening – dollar bulls are just waiting for the moment to organize another rally. It is likely that the EUR/USD pair's downward trend will resume after the announcement of the verdict of the European regulator. The divergence of the positions of the ECB and the Fed will increase pressure on the pair.