FX.co ★ US dollar's upward pullback will be used to continue its sales

As expected, the US regulator, and even more so, its Chairman J. Powell did not mention the possible change in the expected future parameters of monetary policy during the meeting. This indicates that our expectations for the continued weakening of the dollar and the continued demand for risky assets amid the lack of persisting growth in Treasury yields remain the same.

It can be recalled that there was another assumption in the market before the Fed's monetary policy meeting on Wednesday, aside from the stable idea that the regulator would not take any action aimed at changing the course of monetary policy for a long period. The meaning of which was that the bank will begin the process of reducing the purchase of government bonds at the beginning of next year and that Powell will hint about this at a press conference after the meeting. However, this did not happen – neither the resolution of the bank, nor the speech of its leader contained such hints. This caused a new wave of weakening of the dollar. Against this background, its ICE index declined to the level of 90.55 points earlier.

Now, if we return to the topic of the Fed's prospective change in the approach to the principles of monetary policy, we believe that it is actually very possible that the bank will start reducing its bond repurchases at the beginning of the new year. We agree with this, however, there is doubt that the regulator and Powell personally will give any hints about this possibility due to fears of a new wave of uncontrolled sales of Treasuries and a sharp appreciation of the US dollar either before early autumn of this year or already before the new year 2022. It is worth noting that this is harmful in the context of the recovery of the US economy and COVID-19.

We are confident that the Central Bank will take a protectionist position in terms of stimulating the economy for a considerable period of time. This means that under these conditions – the presence of unprecedented incentives and assistance from the US Treasury and the Fed, the markets will continue to demand for the purchase of company shares and so, the US dollar will smoothly weaken, at least keeping it at an acceptable low value in the area of 89-98 points on the ICE index.

As for the likely dynamics of currency pairs where the dollar is present, we believe that it can get local support today with a slight upward pullback amid the publication of GDP data for the Q1. It can be recalled that it is expected to increase by 6.1% against the 4.3% during the previous period.

We expect that the market participants will use the dollar's upward pullback to continue its sales.

Forecast of the day:

The EUR/USD pair is trading above the level of 1.2120. A decline below it will let the price decline to the level of 1.2090, from which the pair should be bought again with likely targets at 1.2150 and 1.2175.

The USD/JPY pair found support at the level of 108.45. We believe that it will pullback upward to 109.00 or even higher to 109.35 before it starts falling again.