Market participants pledged a quarter point reduction in quotes. Few doubt the development of this scenario. Therefore, traders are mostly interested in Jerome Powell's speech at the moment, in which they expect to catch clues on how much the regulator is ready to continue the chosen line of monetary policy. Today, it will not be easy for the US Federal Reserve to manage market expectations.
In recent years, there has been a big gap between the expectations of market participants and the Fed's forecasts. The central bank is trying to tune traders to a more stringent policy, whereas softness is preferable for the market. Now these two points of view have gone towards rapprochement, which has been the most significant market driver since October 2018.
In the past few weeks, the dollar has been influenced by a reassessment of the likelihood of aggressively easing monetary policy. However, the likelihood of such a scenario development has noticeably decreased - from 60% to 20%.
Which way will the US regulator take? The most realistic are the two options, but the third one is possible.
Softness
If the regulators hint that they, like the debt market, are cautious about the future, then shares will continue to grow. Low rates have a positive effect on business activity, fueling demand. In this scenario, the yield of government bonds will fall, however, like the dollar. Such a shift in the central bank's rhetoric is able to launch a trend for months of weakening the US currency. The dollar index can lose 9% and go to 89.
In this case, the 1.23 mark will appear on the horizon before the EUR/USD pair. Donald Trump should be pleased. This is a dubious pleasure for the Fed because its independence will be called into question.
Obscurity
Most likely, Jerome Powell will open all the doors and catch up with the fog, and then market participants will think on their own. Perhaps the Fed chairman will say that the future path is not predetermined, the central bank's decision depends very much on the state of the world and the US economy. This result will leave the stock markets near highs, the dollar index stalled around the mark of 98. Traders at this time will try to extract the necessary information from the data on the labor market. The outcome of trade negotiations will also play an important role. In this case, the euro will have to fight for the 1.10 mark. The reaction of the foreign exchange market could well be harsh, but not for long, emotions will quickly subside and make room for the mind. The trend change for the dollar is not expected.
Stiffness
It is quite possible that today's symbolic easing of politics will become a one-off measure and there will be no hint of further relief. Markets are hardly ready for such a surprise. The dollar will jerk up. The upward trend in USDX can accelerate and by the end of the year will send it to 103, and EUR/USD - to 1.04 or 1.05. Even more unexpected and extreme will be signals that the regulator is considering a rate hike in the near future if trade negotiations with China succeed.
The material has been provided by InstaForex Company - www.instaforex.com