After EUR/USD price swings amid the release of FOMC meeting outcomes, investors are focused on the ECB

Jerome Powell noted that the Fed had had enough chances to increase the interest rate, but he was glad they hadn’t done it before. It was like a cold shower for EUR/USD bears, encouraged by teh FOMC increased expectations. The central bank perfectly understands that the tax reform will have its greatest influence on the US economy during the next few years and increases expected GDP growth in 2018 up to 2.8% (+0/1 bps, compared to its projections in March). The unemployment rate will be down at 3.6% (- 0.2 bps), and the inflation rate will be up at 2.1% (+0.2 bps). In 2019-2020, the Federal Reserve sees the same prospects for the economy expansion (+2.4% and 2%) and inflation (2.1% and 2.1%), but unemployment will continue declining (3.5% and 3.5%, in March - 3.6% and 3.6%)

8 out of 15 FOMC members expect 4 hikes of the federal funds rate in 2018, so the median forecast increased, which can be seen as a bullish driver for the greenback. Its inability to get use of it can be explained by that the factor has been included in the dollar pairs’ quotes, and by Jerome Powell’s peaceful rhetoric. According to the Fed’s chairman, the central bank can’t depend too much on non-observed variables. It is about the natural unemployment level, which, according to the regulator, is at 4.5%, 1 bps higher than it is expected in 2019. So, the Fed’s chair doubts in the link between the indicator decline and inflation growth. The central bank is still going to accept the latter; and the reference to the gradual monetary normalization expectedly discouraged EUR/USD bears.

FOMC projections

Source: Wall Street Journal

The Fed expects to raise the interest rate three times in 2019, and at least once in 2020. It is remarkable that 59% out of 60 Wall Street Journal experts believe that the US economy will face recession in two years. 22% of them chose 2021, the rest of them -2022 and later. According to 62%, the main reason for the recession will be the economy's overheating that will make central bank aggressively restrict monetary policy. Median forecasts for GDP and unemployment for 2018 are at 2.8% and 3.7%. The average recession risk within the next twelve years is estimated at 15%.

So, the FOMC meeting in June brought quite expected outcomes, driving EUR/USD back up above figure 18 base. Currently, investors are focused on the ECB that is going to face a real challenge- correct its own projections, including GDP decline to 0.4 % Q-o-Q in the first quarter and an increase in consumer price growth up to 1.9% in May. In March, they expected economic growth at 2.4% in 2018, at 1.9% in 2019, and at 1.7% in 2020. Inflation rate should be up by 1.4%, 1.4%, and 1.7% during these years. At the same time, investors are looking forward to any clues about QE, functioning through September. The central bank should clarify the situation in June or July. If it does, it may encourage bulls to storm the resistances at 1.1815-1.1820 and at 1.1835-1.184. 

Dollar Took Cold Shower

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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