FX.co ★ Fed is in a difficult position. Improving economic forecasts does not change anything. Overview of USD, EUR, and GBP

It was noticeable that the market was nervous before the FOMC meeting. The yield of the US Treasury reached a new annual high, and the US dollar gained a foothold in the status of a safe asset. However, the Fed left the rate unchanged, which was already expected by most experts. The QE rates were also maintained at 120 billion per month, while the forecasts for rate slightly changed. This year, all 18 FOMC participants think there is no need for an increase in the rate. In 2022, only four have seen such reasons, while in 2023, we only got seven, which is actually insignificant.

PCE is expected to rise by 2.4% this year, followed by a decline to 2% in 2022, and then another growth to 2.1% in 2023. The benchmark PCE, the Fed's preferred measure of inflation, is projected to hit 2.2% this year and fall to 2% in 2022. Therefore, the Fed confirms that it will tolerate a period of above-target inflation before considering raising interest rates.

Meanwhile, other Fed forecasts showed a sharp recovery in GDP growth to 6.5% in 2021 (previously 4.2%) and 3.9% in 2022. The unemployment rate is expected to decline to 4.5% in 2021, and then return to 3.5% by the end of 2023. At the same time, it is worth noting an important nuance – the Fed does not see a significant growth in wages even with an unemployment rate of 3.5% in 2023. If inflation remains stable at 2.1% in 2023, then maximum employment requires a lower unemployment rate.

The results of the Fed meeting should be considered as "dovish". This is because they failed to comment on one of the main issues on which there is disagreement, namely the preservation of benefits for banks, which are the main buyers of government debt. It should be noted that this issue has not been resolved yet, which means that the current privileges will most likely remain for the time being. For the markets, this means stability and risk reduction.

The US dollar clearly fell, but nothing changed for it in the long term. After yesterday's pullback, we should expect that it will return to the upward course.

EUR/USD

Eurozone's consumer inflation shows a small but stable growth of 0.9% y/y. The published data on Wednesday was almost in line with forecasts.

Investors expect the ECB to implement the task of maintaining favorable financing conditions, which means the need to target yields on long-term bonds, whose growth rate should not exceed the growth rate of inflation.

While the situation in the euro zone debt market looks balanced, we must assume that the spread of yields on US and Eurozone bonds will be in favor of the US dollar. In this case, the downward pressure on the euro will continue.

Euro's upward pullback to the level of 1.1990 gives a good selling point. There is still a high probability of a decline to the level of 1.1835 with a subsequent break below.

GBP/USD

The Bank of England is lagging behind the Fed for several months. Therefore, we should not expect any drastic changes from today's meeting. The signals coming from the members of the Committee are mixed. Haldane talks about inflation risks as the economy returns to normal, which should be regarded as a bullish signal for the pound, while BoE Chairman, Bailey does not comment on these changes. It is possible that the Bank of England will slightly improve its forecasts and warn about the risks from changes in market prices, and only that. The pound sterling is unlikely to receive support after the meeting.

A rise to the level of 1.3978 as a reaction to the results of the FOMC meeting is unconvincing. This level is below the previous high of 1.4002, and thus, a decline to the support zone of 1.3910/30 with a subsequent break below, is more probable. The long-term target of 1.3730/50 maintains its relevance.