FX.co ★ USD shows rally. US Fed's decisions may boost USD

The US dollar is still showing impressive performance despite some difficulties caused by the Fed's decisions on the future monetary policy.

The greenback continued rising after it was boosted by positive data on the US labor market. Now, the currency is making attempts to keep its current positions.

The US dollar was also supported by the regulator's announcement about possible changes in the monetary policy. Taking a decision, the Fed takes into account two key factors – unemployment rate and inflation. Earlier, Jerome Powell emphasized that the key interest rate would be unchanged until inflation returned to its pre-crisis level. He believes that inflation should consolidate above 2%.

Both indicators have reached the needed levels. The US inflation is rising at the highest pace in the last 10 years. There is a risk of hyperinflation. The US labor market situation is also improving. Most indicators have already reached the targeted levels.

After the publication of positive data on the US labor market, representatives of the regulator began talking about the tightening of the monetary policy. The first one was Raphael W. Bostic, the fifteenth president and chief executive officer of the Federal Reserve Bank of Atlanta.

Together with Thomas Barkin, CEO of the Federal Reserve Bank of Richmond, Bostic emphasized that the US inflation hit the needed levels. If the rise continues, the Fed will start closing the QE program in the fourth quarter of 2021. Under this program, every month the regulator allocates about $120 billion.

At the moment, market participants are afraid of uncontrolled price growth. That is why signals about a possible reduction in QE are considered to be positive. The current situation contributes to the growth in the greenback. This, in turn, is encouraging markets. R. Bostik supports the closing of bond purchases program and is ready to start implementing this plan from September of this year, if the pace of labor market recovery remains the same.

The position of the president of the Federal Reserve Bank of Atlanta meets the opinion of the members of the Fed, who expect strong data on the labor market in the United States over the next two months. In such a situation, the withdrawal of the QE program will be timely. If the current trend continues, the regulator may make significant progress in achieving its goal and will be able to develop the principles of a new monetary policy. According to R. Bostik, the first rise in the key rate is expected at the very end of 2022.

At the moment, the US dollar is trading at the four-month high against the euro. Against this background, bears of the euro/dollar pair became extremely active. However, bulls may soon gain control over the market. On Wednesday, August 11, a weak support level for the euro was formed near 1.1712. Notably, both currencies were below the moving averages. Early on Wednesday, the euro/dollar pair was trading near 1.1712, trying to jump higher. If the price breaks the level of 1.1731, bulls may gain control over the market. In this case, the euro/dollar pair may reach such levels as 1.1762 and 1.1798.

If the trend remains the same, the pair will continue trading within the levels of 1.1712-1.1730. The bearish scenario will come true, if the price breaks the support level of 1.1712. In this case, the quote may slide to 1.1645 and 1.1611.

At the moment, the greenback is supported by the expectations of the changes in the Fed's policy. Higher demand for safe-haven assets amid the spread of Delta virus is also boosting the US currency. At the same time, traders are opening more and more long positions on the dollar expecting further actions from the Fed. Of course, they are looking forward to the tightening of the monetary policy by the end of the year.

This week, the regulator has significantly revised its policy. The stance became more hawkish. This is proved by the comments provided by Rosengren and Bostic. Strong data on the US labor market became the icing on the cake. It has significantly boosted the US dollar.

Analysts suppose that positive reports on the US labor market will contribute to the US dollar growth and regulator's future policy. The greenback will receive additional upward impulse that will become even stronger amid the withdrawal of the QE program.