The results of the November meeting of the Fed were in favor of the greenback. The US dollar index rushed up sharply, having updated a two-week high. Major dollar pairs changed their configuration accordingly. In particular, the EUR/USD pair settled within the 97th figure—the last time the pair was in this area was two weeks ago, at the end of October.
It is noteworthy that immediately after the announcement of the results of the November meeting, the greenback noticeably sank throughout the market—in particular, the euro-dollar pair jumped to 0.9975. The time gap between the publication of the accompanying statement and Jerome Powell's press conference is only half an hour, but that was enough for EUR/USD buyers to show character. However, at the final press briefing, the head of the Fed completely redrawn the fundamental background for the dollar, explaining the main positions of the accompanying statement and specifying further prospects. With his rhetoric, Powell provided significant support to the dollar, allowing the EUR/USD bears to reverse the pair by 180 degrees.
So, let's start with the formal results. The Fed is expected to raise the interest rate by 75 points. The text of the accompanying statement was balanced, perhaps, except for one phrase, for which the buyers of EUR/USD caught on. The Federal Reserve indicated that in determining the future prospects, it will "take into account the cumulative volume of monetary policy tightening and the lagging effects of monetary policy."
On the eve of the November meeting, rumors spread in the market that the regulator could signal a slowdown in the rate hike in December and at subsequent meetings. The information background was pumped up in a certain way—any "dovish" hint, even the most indirect, would a priori be perceived by the market in a hypertrophied way. Therefore, it is not surprising that traders reacted to the rhetoric of the accompanying statement with an upward jerk. The pair jumped to 0.9775, and probably would have reached the parity level if Powell hadn't stopped the buyers.
The head of the Federal Reserve, by and large, leveled all the assumptions of a dovish nature. At least in the context of the foreseeable future, that is, until the end of the year. He voiced hawkish theses, emphasizing the need for further tightening of financial conditions. In particular, he noted that the regulator does not see "significant progress by the Fed" in achieving its goals over the past month. According to Powell, "the data received after the last (October) meeting suggests that the final level of interest rates will be higher than previously expected."
Perhaps this is the key phrase voiced yesterday by the head of the Fed. The most important signal for traders. In fact, it is not so unimportant at what pace the regulator will tighten monetary policy in the coming months: the interest rate in the US will de facto peak at a higher level than expected. Also, Powell emphasized that it is premature to even think about the suspension of the rate increase today.
At the same time, he admitted that the Fed may indeed slow down the pace of monetary tightening in February next year or even in December (this issue will be discussed at the next meeting). But this phrase has already lost its original meaning: as Powell himself noted, "speed is now becoming less important." Indeed, judging by the reaction of the dollar bulls, the pace of the rate hike has faded into the background, as the end point of the current cycle, like a mirage, moves further and further.
Given the "updated" position of the Fed, we can conclude that to contain inflation, a base policy rate of at least 5% will be required. By the way, after the announcement of the results of the November meeting, many currency strategists have already revised their earlier forecasts. In particular, Danske Bank experts have corrected their forecast, and now they see the final rate at 5.25%. At the same time, they expect a 75-point increase in the rate in December, and a 50-point hike in February.
Thus, Jerome Powell, on the one hand, allowed the pace of monetary tightening to slow down, but on the other hand warned that the rate would eventually peak at a higher level than previously expected. Such a signal was interpreted by the market unambiguously in favor of the US currency.
Meanwhile, the opposite signals are coming from the ECB. For example, ECB policymaker Mario Centeno said today that the regulator has already implemented most of the necessary rate hikes to curb inflation in the eurozone. It is worth recalling here that earlier ECB President Christine Lagarde also spoke about the time frame of this process. According to her, the central bank will raise rates in several meetings—"from two to five."
In other words, the fundamental picture is gradually emerging in favor of the EUR/USD bears. The nonfarm payrolls report will also play a certain role this week, although Friday's release is unlikely to make traders turn their backs on greenback. Yesterday, Powell sounded a crucial signal, the significance of which can hardly be overestimated: by and large, verbal speculation about the slowdown in the tightening of the Fed's monetary policy has lost its former meaning. Therefore, any corrective surges in the EUR/USD pair should be used to open short positions. The nearest support level (medium-term downward target) is 0.9640, which corresponds to the lower line of the Bollinger Bands indicator on the D1 timeframe.