The currency market sometimes presents surprises when the fundamental picture changes its color dramatically. It also happens when the market only interprets events from a certain angle, changing the direction of the main currency pairs. A similar situation happened yesterday.
Throughout the week, the EUR / USD pair was under constant pressure, which during the trading session either increased or weakened slightly but on the whole, it was stable. Nervousness over China, uncertainty with Brexit and the Italian budget, rising key indicators of the American economy, hawkish statements by Fed members and rising yields of 10-year treasures. All these factors dragged the pair down to the 12th figure base. Such a unipolar fundamental background made it possible to make well-founded forecasts, the essence of which was to continue the downward movement, at least until the outcome of the G20 summit.
As it turned out, traders were looking only for a reason to deploy EUR / USD. At least in the context of a corrective pullback. Such a pretext appeared yesterday, although its validity raises big questions. We are talking about yesterday's speech by Fed Chairman Jerome Powell, which caused a wide resonance in the financial world. The fact is that Powell has recently quite consistently taken a "moderately hawkish" position, optimistically assessing the prospects for the US economy, and accordingly, the dynamics of tightening monetary policy. Not so long ago, he said a capacious phrase that characterized his policy, "The market must get used to the idea that the interest rate will continue to increase gradually". Many of his colleagues spoke in the same vein, in the overwhelming majority they shared the position of their "boss".
That is why Powell's statement yesterday that the interest rate was "directly below the neutral level" caused a great surprise in the markets. After all, even in October, the Fed chief stated unequivocally that the Fed is still very far from the notorious neutral level and moreover, the regulator may exceed this target if necessary. Building on these words, the market maximized the likelihood of a December rate hike and, accordingly, increased the chances of maintaining the pace of monetary tightening next year (focusing on three increases). But yesterday's Powell speech again mixed all the cards, sowing doubts among dollar bulls. The market was clearly not ready for this turn of events, so the dollar index collapsed in a few hours from 97.42 to 96.55 points, and the euro-dollar pair, respectively, grew by more than 100 points. Today, the market is trading by inertia while maintaining a cautious attitude regarding the US currency.
What explains this "verbal demarche" by Jerome Powell, who is known for his well-balanced and to some extent predictable? On this account, there are several opinions of currency strategists. For the most part, they are confident that the market simply misinterpreted the words of the head of the Fed, or rather, made hasty conclusions, taking his words out of context. After all, Powell, in his speech, clarified that the rates are undervalues that, according to a wide range of estimates, represent a neutral level for the economy. And if we take into account his full phrase, the situation looks drastically different, since the above range is located at elevations of 2.5% -3.5%. This is consistent with his position, which he voiced for a long time (at least for six months).
According to other experts, Jerome Powell intentionally made such a "pigeon" reservation, as the market misunderstood him back in October. According to them, the thesis that "it's still too far to the neutral level" is wrong, and the Fed Chairman just fixed his mistake yesterday. Even in this context, his position does not look soft. As I said above, the approximate range, "inside" of which there can be a neutral level, is quite wide - 2.5% -3.5%. Therefore, even if the current rate approaches this area, this does not mean that the Fed will abandon its original intentions for the next year.
In general, yesterday's events suggest that the main question of the next year is gradually coming to the fore, when will the process of tightening monetary policy be put on "pause"? Jerome Powell has repeatedly stated that the Fed is still discussing at what level the neutral rate will be reached, this issue is not easy and controversial. By the way, Fed Vice Chairman Richard Clarida, who last week also said that the rate "approached its neutral level," the day before yesterday somewhat toughened the tone of its rhetoric. He clarified that the prospects for tightening monetary policy will depend on incoming macroeconomic data. First of all, the regulator will monitor how the decline in unemployment will affect the increase in inflationary pressure.
Thus, the market reaction to yesterday's speech by Jerome Powell looks exaggerated. The head of the Fed is optimistic about the current state of the US economy and in no way hinted at a forced slowdown in the tightening of monetary policy. The market has made all other conclusions independently, beating Powell's words in his interpretation.
The material has been provided by InstaForex Company - www.instaforex.com