The perpetrators of the pause in the Fed monetary normalization have been found

Jerome Powell surprised the financial markets in December, reassured in January and doesn’t disappoint in February. Even if the Fed CEO hasn’t offered investors new ideas, he has clearly explained everything. The US economy is still strong, however the troubles from abroad make the central bank be patient. A decline in Chinese and European GDP growth, uncertainty around trade wars and Brexit are the processes that can’t be controlled by the Federal Reserve. And so, it is time to wait and see.

According to Powell, the markets have become less stable and the financial conditions don’t support the economic expansion as much as they used to. Quite a smart observation, however, it must be understood that these processes have been also triggered by the Fed. Monetary normalization increases borrowing costs, which, along with S&P 500 correction, resulted from the Fed president’s mistake, causes tightening of the financial conditions. In addition, the protectionism pressed down global GDP growth, so it is clear who is guilty. Donald Trump, Steve Mnuchin and ...Jerome Powell. People, who dined together in the White House not so long ago. A senator even asked directly if they could agree not to hike the interest rate. The Fed CEO noted that he wouldn’t discuss private talks.

In the meanwhile, the interest in the reassessment of Fed’s inflation-targeting approaches is increasing. Powell has confirmed the idea, recently offered by New York Fed leader John Williams that the inflation target could be above 2% in good times for the US economy. The central bank should refer to the average for business cycle indicator and ignore the inflation growth above the target during strong and fast growth of the US economy. If it is really so, the federal funds rate will hardly rise in the near future. It is not a good news bit for the U.S. dollar.

In general, it must be admitted that Jerome Powell hasn’t disappointed the financial market: volatility is still going down and but for the consumer confidence index rebound, the EUR/USD could have continued its rally.

Dynamics of financial markets volatility

Source: Bloomberg 

The ECB representative are also trying to reassure the electorate. According the Governor of the Central Bank of Ireland, chief ECB economist Phillip Lane, the euro-area economy is not in so weak. A recent decline in economic data will result in just reasonable revisions of the Governing Council forecasts. Nothing more. The market is already anticipating the revision, which will mean a slower normalization of the monetary policy, rather than absence of it. A good news bit for the euro buyers!

In the short rum, if the bulls hold the EUR/USD rate above 1.137, it will be more likely to continue its rally towards the top of the consolidation range of 1.125-1.15. Nonetheless, most traders prefer to stay aside before the report on the US GDP data.

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Price chart of EURUSD in real time mode

Dollar: who is guilty and what to do?

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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