Ignorance is not an excuse. No one—neither the Fed nor the financial markets—knows exactly with what time lag the tightening of monetary policy affects the economy. A miscalculation will be a blow to the credibility of the central bank, and investors will lose money. So far, stock indices and EURUSD have been rising because it was believed that most of the negativity from the federal funds rate hike has not yet been taken into account by U.S. GDP. The result has been a scenario where inflation is slowing and a recession is about to occur. But what if that's not the case?
According to Goldman Sachs, the biggest damage from tightening financial conditions has already been done to the economy. It has adapted and will continue to please more than upset. As a result, there are risks of repeated acceleration of inflation and an increase in the federal funds rate to 6%. The bank expressed this position in January and deservedly treated dissidents, because most investors preferred a scenario with a slowdown in consumer prices and a recession.
Dynamics of financial conditions in the USA
If the majority had always been right, the Sun would still be orbiting the Earth. In early February, Goldman Sachs' January dissent translates into a strategy that changes the balance of power in the EURUSD pair. The new momentum of the U.S. economy returns such a trump card as American exceptionalism to the dollar, and the readiness of the futures market to adjust its expectations in accordance with FOMC forecasts becomes another bullish factor for the USD index.
In particular, after the strong employment statistics in the Unites States, derivatives began to expect the federal funds rate to rise to almost 5.5%. A very high figure! Not so much for the ECB deposit rate, which the markets expect to be below 3.5%.
Dynamics of the Federal Funds Rate and Derivatives Market Expectations
Thanks to one report, the U.S. dollar has risen from the ashes, and investors are wary of the imminent release of consumer price data for January. If inflation rises again, the Fed might accelerate its monetary easing policy and push the EURUSD bulls to the bottom of the barrel.
As for Jerome Powell's upcoming speech, it may have little effect on the balance of power in the main currency pair. Investors have long realized that the Fed is engaged in idle chatter. It can chant all it wants about keeping borrowing costs at a peak, but with monetary policy depending on the data, the tune of its songs will change. For now, the statistics support the December FOMC forecasts.
Technically, there is a correction to the long-term upward trend on the EURUSD daily chart. Quotes have broken through support in the form of a combination of moving averages and are heading downward. In this case, the rebound from the resistance in the form of the lower boundary of the fair value and pivot point at 1.076 may be the reason for short-term selling in the direction of 1.069 and 1.059. It makes sense to roll over there.