FX.co ★ The dollar weakens ahead of the announcement of the results of the Fed meeting

The USD index rose in activity yesterday, moving to the level of 97.02, but then turned around and quickly went down, updating the three-month lows at the base of the 96th figure. Rumors about the possible decisions on the Fed meeting are the main reason for the abrupt change in the movement.

One cause of the ongoing weakening of the US dollar is the news that the Fed has decided to expand its business lending program, the purpose for which is to help the small and medium-sized businesses that suffered the most during the coronavirus pandemic. Fed members have reduced the minimum borrowing amount from $ 500 thousand to $ 250 thousand, and increased the loan term from 4 years to 5 years, with a simultaneous increase in the term for repayment of the main debt (from one year to two years). The share of the Fed in loans to small and medium-sized businesses that fall under the terms of the program was also increased to 95%.

Such news was very positive for the US labor market, as earlier, representatives of small and medium-sized businesses could not get support from the program of buying securities on the open market. The expansion of the program will not only contribute to an increase in the number of employees, but also decrease the unemployment figures. Unfortunately, the dollar was not optimistic to such a decision, reacting negatively instead to the Fed's commitment to the monetary policy.

Rumors also arose that the Fed is set to follow the footsteps of the Bank of Japan and the Reserve Bank of Australia regarding treasuries. Similar assumptions were already made back in May, but the talks now seem more serious, especially with the latest Fed meeting. According to data published by Bloomberg, some experts believe that the Fed will soon limit the yield of treasury bonds by buying them in the required quantities. Some Fed Representatives also assumed the likelihood of this scenario, Governor Lael Brainard in particular. In addition, Fed Vice President Richard Clarida, in response to a related question, said that the regulator plans to study "similar experiences of other central banks."

Meanwhile, Fed Chairman Jerome Powell has repeatedly stated over the past month that monetary stimulation will be unlimited until the end of the coronavirus crisis. He also said that if necessary, the Fed will use "all available tools" to help the economy. Thus, there is a high chance that the values of nonfarm payrolls are going to be ignored (especially if inflation comes out in the red zone today), and detailed talks on "available tools" will be discussed instead.

With regards to the nonfarm payrolls, the data on the US labor market really came out much better than expected. Unfortunately, the bears still prevailed, and judging by the comments of many experts, the market had too many hopes for the June meeting, based solely on May Nonfarm data alone. Thus, according to some supporters, since Powell seems to be focusing on strong reports on the US labor market only, the Fed may resort soon to an exit from the regime of extreme incentive measures.

Opposite scenario, on the other hand, sees that since the Fed expanded its business lending program, the stimulus policy remains as the "backbone" of the regulator. In addition, unemployment has already reached 13.3%, much higher than the peak of the last recession. Even if indicators are to come out much better than predicted, catastrophic situations could still occur in the labor market. Recent events will inevitably affect consumer demand, which in turn will negatively affect the profits of companies.

Thus, in this regard, the USD index came under pressure, and whether these rumors will come true or not is an open question. The outcome will be revealed tonight, in which if the Fed's rhetoric is not as soft as the market expects, the dollar will return to the borders of the 97th figure. However, if Powell confirms the rumors (especially if the Fed touches on the control of the yield curve), the dollar will again fall under the wave of sell-offs.

As for the EUR/USD pair, the direction of the quotes will base on the results of the Fed meeting. The decisions will determine whether the pair will continue its upward movement, or if the quotes will undergo a correction, right up to the base of the 12th figure. Nevertheless, a bullish mood still remains specially on the daily chart, since the quotes remain between the middle and upper lines of the Bollinger Bands, as well as above all the lines of the Ichimoku indicator. But despite such a technical picture, it is advisable to make trading decisions according to the results that will come out today.