FX.co ★ Could USD strengthen after Fed's decision?

Throughout the current week, the US dollar has been waiting for a push. The greenback may well strengthen amid the two-day meeting of the US Federal Reserve.

On Wednesday, June 16th, the FOMC meeting ends. Many experts consider the meeting to be the key event of the first six months of 2021. The US regulator is likely to address such important issues as the future of monetary policy and the possibility of stimulus extension. The question that is bothering the market is: "Will the Fed keep the federal fund rate at the same level in 2023-2024 or will it tighten monetary policy? The central bank is believed to be cautious and focus on the labor market. Earlier, the Fed allowed a temporary increase in inflation somewhat above its 2% target until the unemployment rate falls.

The regulator is expected to keep monetary policy unchanged. At the same time, there is a chance that the Fed may review its inflation outlook upward despite seeing inflation as temporary. Some analysts expect US inflation to peak and then plunge in the second half of 2021.

All this has a negative effect on the US currency. According to the Bank of America, the greenback will rise in price by the end of the year because the Fed will be restraining inflation growth. The bank's monthly survey shows that 20% of investors considered the US dollar to be overvalued and noted that it increased by 5 percentage points. Meanwhile, the euro was recognized as undervalued.

Experts see the current situation and Fed Chairman Jerome Powell's rhetoric mainly as hawkish rather than dovish. The regulator is also expected to touch upon the possibility of QE tapering. According to Danske Research, EUR/USD could fall below 1.2000 due to a hawkish Federal Reserve. On Wednesday, June 16th, EUR/USD went down to 1.2130 from above 1.2200.

For as long as the markets agree with the US regulator's point of view that the recent rise in inflation is temporary, nothing is going to change. However, the patience of traders and investors has its limits, they may well begin to influence the situation. According to the latest data, inflation in the US soared to 5% and core inflation grew to 3.8%. If inflation keeps accelerating, the Federal Reserve will have to curtail its unprecedented stimulus program. Meanwhile, the difference between the yield on 10-year Treasuries and inflation is at its highest level since 1980. Global liquidity is shrinking as balance sheets of central banks no longer expand.

There is no consensus among the world's leading economies about the tapering of monetary stimuli. However, the ECB is still maintaining loose monetary policy and negative interest rates. The Bank of Japan adheres to a similar approach. At the same time, the markets are ready for a possible change in the Fed's rhetoric, as well as for adjusting its economic outlook. The regulator may slightly improve its short-term US GDP growth forecast. However, the long-term outlook is unlikely to be reviewed.

The current situation may negatively affect the greenback. According to Danske Research, Powell's recent announcements led to the weakening of USD in the second quarter. At the moment, when the stock market has slightly shifted towards technology stocks, and inflation is well estimated, experts are counting on the Fed's hawkish stance on a number of issues. Danske Research assumes that such a rhetoric of the regulator will boost the greenback.