FX.co ★ What will Powell say?

Today, the Fed Chairman, Jerome Powell, is waiting for a difficult press conference where he will have to be as resourceful as possible. Powell will have to justify a rate hike, recognize a slowdown in economic growth, and at the same time, they were able to convince investors of its strength. In addition, he will change the signals to the market and report a slowdown in the tightening cycle of the policy. At the same time, the head of the Central Bank would most likely prefer to bypass the topic of stopping the folding of QE, although this would help to even out the situation.

A certain drama in the overall tense situation on the market adds an unprecedented criticism of Donald Trump against the Fed. Recall that the head of the White House does not support the position of Powell and considers inappropriate another rate increase in the difficult economic and political time. Such loud and constant criticism puts the Central Bank in an awkward position. In order to preserve its independence from the US president, the regulator will not refuse to increase rates, even if it considers it appropriate.

The Fed will have to demonstrate the same quirkiness as the ECB. Mario Draghi was able to simultaneously note the slowdown in economic growth and at the same time express confidence in growth to be able to continue tightening the policies by curtailing the QE program.

The American regulator partly placed himself in the position in which he is now, as he gave clear signals for a subsequent increase in interest rates. If the financial authorities adhered to the pre-crisis policy with its opacity and mystery, it would hardly have been under Trump's aim.

Powell has already announced that signals to markets will become more vague but it will be difficult to convince investors of this. According to officials of the Federal Reserve, rate decisions always depend on data but they adhered to their own independent of macro statistics forecasts. Inflation is still weak and the Central Bank stubbornly raises the rates, as if prices are confidently rushing forward.

What does the market think?

Now market participants are waiting for worsening forecasts. Instead of three acts of tightening policy, two are expected next year. They also expect that the wording about "gradual normalization" will be replaced by "dependence of the decisions made on incoming data" and preservation of the previous scale of balance reduction. Note that the Fed does not reinvest its revenues from bonds to be redeemed in the amount of $ 50 billion a month. As a result, its assets are reduced, in contrast to the assets of the European and Japanese Central Bank.

Dollar reaction

According to analysts at Citigroup, the American dollar simply cannot fall in price after the FOMC meeting for the simple reason that all the negatives from the Fed pigeon's position are already included in the quotes. The dollar index can significantly go down if the regulator suddenly decides to keep rates at the same level of 2.25%.

As for the rally of the EUR/USD pair, the growth is due to speculation about the changing worldview of the Fed. If the regulator maintains its previous views, the dollar will immediately recover losses. The actual slowdown in the policy normalization cycle will allow euro fans to rely on early testing of the $1.1445 mark.