FX.co ★ EUR/USD. Powell won the battle, but not the war: dollar regains lost ground

The dollar has regained lost ground against the euro today. The greenback weakened throughout the market following the results of the Federal Reserve's March meeting, "believing" the dovish sayings of Chairman Jerome Powell. But today the situation has dramatically changed: the dollar followed the 10-year Treasury yield, which in turn exceeded the 1.7% mark - for the first time since January 2020. In my opinion, the dollar has naturally returned to its duty. While the currency's behavior from yesterday looked somewhat abnormal, given the entire background of the Fed's March meeting. Figuratively speaking, Powell won a verbal battle with investors, convincing them that the central bank would adhere to an accommodative policy against all odds, that is, despite the V-shaped recovery of the US economy. But Powell did not have to rest on his laurels for a long time: a day later, traders rethought the results of yesterday's meeting, afterwards the yield of US bonds again jumped, pulling the dollar along with it.

In general, it is worth noting that the Fed's March meeting turned out to be very unusual and somewhat contradictory. On the one hand, the US central bank dramatically improved forecasts for the growth rate of the US economy this year, on the other hand, it voiced dovish rhetoric, refuting rumors that the central bank will begin to wind down QE in the fourth quarter. In other words, "on paper" the Fed declared a very optimistic scenario, but in words it voiced a rather cautious position through Powell's mouth. The market succumbed to Powell's dovish rhetoric following yesterday's results, which is why the dollar weakened against a basket of major currencies.

In particular, Powell said that the US economy is recovering unevenly, inflation remains below the target two percent level, and in general, the future prospects largely depend on the situation with the virus and vaccination. That is, there is still uncertainty, which does not allow us to talk about the time targets for an increase in the interest rate. Powell also once again recalled that the central bank will allow inflation to exceed the target level for some time. This remark is consistent with his previous statements on this issue, but yesterday the dollar still weakened after these words. Powell added that the central bank will approach this issue comprehensively, waiting for "significant and stable progress in the economy." And only after that will the Fed begin to consider the issue of changing monetary policy.

Take note that Powell repeatedly voiced such rhetoric, so there was no sensation in his words. Apparently, the market expected a more optimistic note from him, given the positive dynamics of the US labor market, the implementation of a large-scale 1.9-trillion bailout program and rumors about the White House's intentions to review tax policy. However, Powell remained true to himself, maintaining a cautious and restrained position.

And yet, in my opinion, the results of the March meeting are hawkish, despite Powell's opposite rhetoric. First, as mentioned above, the Fed has revised its economic forecasts in the direction of improvement. The US GDP is expected to increase by 6.5% in 2021. If this forecast is justified, the US economy will show the strongest growth rate in the last 37 years! Moreover, according to a number of analysts (in particular, analysts of Goldman Sachs), this figure will grow not by six percent, but by all eight. In fact, Powell himself acknowledged that the recovery in economic activity is taking place at a faster pace due to unprecedented fiscal and monetary stimulus.

Another factor in favor of the greenback is the Fed's spot forecast. They announced that at the moment, four representatives of the Committee expect a rate increase starting in 2022. At the same time, only one representative of the Fed held this opinion at the December meeting. However, there is also a downside: the number of members of the central bank expecting a rate increase in 2023 has increased to seven (in December there were five).

Also, do not forget that the dollar was gaining momentum throughout the market even before the March Fed meeting for a number of fundamental reasons. The active implementation of the "Plan to Save America " against the background of no less active vaccination rates in the United States strengthens the greenback's position. Around 113 million people have already received the first vaccination in the United States, but almost 40 million Americans (that is, 35% and 12% of the total population of the country) have managed to get a "full set". While in Europe, 14 countries have already suspended vaccination with AstraZeneca. And although the analysts of the OIE, as well as the experts of the EMA (European Central Bank), have assured the public that the vaccine is safe, the authorities of the aforementioned countries are in no hurry to resume vaccination with this drug. Again, as a comparison, it is worth saying that in America, on average, about 2 million anti-ovoid vaccinations are given per day.

There are several other factors that are still indirect on the side of the greenback. In particular, we are talking about increasing geopolitical tension along the lines of "USA-North Korea", "USA-Iran "and "USA-Russia". As you know, when anti-risk sentiment spikes, the dollar is in high demand, so the greenback receives background support from this side. Also, we should not forget about the White House's intentions to review tax policy (the reform involves an increase in the tax burden for corporations and wealthy US citizens). At the moment, this information is unofficial, but even in this form it pushes the greenback up.

From the technical point of view, the price is located between the middle and lower lines of the Bollinger Bands on the daily chart, as well as under the Kumo cloud and between the Tenkan-sen and Kijun-sen lines of the Ichimoku indicator. During the day, the EUR/USD bears tried to go below the 1.1905 mark several times (the Tenkan-sen line on D1), but they moved away from this support level each time. Therefore, it is advisable to open short positions once this target has been surpassed. The main target of the downward movement in the medium term is located at 1.1840 - this is the lower line of the Bollinger Bands indicator on the same timeframe.