The US Federal Reserve fully met the expectations of the markets. Despite some disputes on the eve of the meeting, most experts were confident that the regulator would reduce the interest rate by 25 basis points. Intrigue persisted only in the part of Jerome Powell's subsequent rhetoric regarding the future prospects of monetary policy, but the US Central Bank was able to surprise traders even before the press conference of the head of the Fed, indicating a split in their ranks. This fact supported the dollar, which yesterday strengthened throughout the market, despite a decrease in interest rates.
In general, the American events reminded of a split in the ECB camp. It is only now that the greenback has become the beneficiary of this situation. Let me remind you that members of the European regulator also disagreed on the resumption of the incentive program. Moreover, such political "heavyweights" as Germany, France, and Austria took the side of the "hawks". As a result, the euro jumped in pair with the dollar by several figures (from 09th to 11th), despite the "dovish" decisions of the Central Bank.
In turn, the Federal Reserve mirrored European battles. Against the interest rate cut, Fed members such as Kansas Fed Chairman Esther George and Boston Fed Chairman Eric Rosengren again spoke out. They were against the easing of monetary policy in July, so yesterday they only confirmed their reputation. Considering the fact that their position was largely predictable, the EUR/USD bulls were more disappointed with the dot chart of the Fed members' expectations, according to which the rate will remain at the current level at least until the end of 2019. It is worth noting that earlier, the probability of another round of rate cuts was quite high. Judging by the futures on the Fed rate, more than half of the market participants expected such a move from the regulator. Therefore, the published point forecast clearly played in favor of the US currency.
Although here, members of the Fed did not show unanimity. Ten members of the regulator see no reason for easing monetary policy until the end of this year, while seven still allowed this scenario. If we talk about the prospects for next year, here the split takes on a more pronounced character: eight members of the Committee stated the need to maintain a wait-and-see attitude, while the rest of their colleagues think differently. In their opinion, the regulator should increase the rate back by at least 25 basis points. Thus, the prospects for the monetary policy of the Fed remain vague, although even the most pessimistic scenario of the regulator does not imply an aggressive easing of monetary policy parameters.
Jerome Powell, himself, tried to maintain a balance between hawks and bears. At his press conference, he strongly avoided making any predictions regarding future prospects, "hiding" behind vague and ambiguous formulations. He said that members of the regulator will make decisions depending on the current situation, while monitoring key indicators and other factors. " Powell did not announce further steps towards monetary policy easing, but he did not say that the September rate cut was the last this year. In other words, the head of the Fed left a certain gap for a possible maneuver but the market "did not believe" him, relying on the point forecast of the regulator.
Thus, the results of the September meeting could not support the EUR/USD bulls, but at the same time, they could not provoke a dollar rally. The pair remained within the 10th figure and price fluctuations were more like market noise.
It can be assumed that the prospects for the monetary policy of the Fed depend on the prospects for US-Chinese trade relations. Perhaps this explains the excessive caution of Jerome Powell, who remained "over the fray" of the regulator members. Indeed, the next trade negotiations between Beijing and Washington will begin only in early October, so it is not advisable to draw any long-term conclusions.
Arguing for a rate cut, the Federal Reserve focused on a decrease in exports and investment in fixed assets. Obviously, all these are consequences of the global trade conflict, which will only worsen if the 13th round of negotiations ends like all the previous ones. It is noteworthy that the regulator only casually mentioned the positive dynamics of key macroeconomic indicators (inflation, GDP, Nonfarm, salaries, etc.). Relevant comments Powell said that "the US economy is in great shape, but ...". Behind this "but" are the risks of a further escalation of the trade war and the negative consequences of increased uncertainty.
In other words, Jerome Powell shifted his focus once again to the prospects for the development of the US-Chinese conflict. By and large, the fate of the American currency in the long run now depends on the outcome of the next negotiations between the United States and China. If the parties come to a compromise in spite of that (which is unlikely), the greenback will receive strong support because in this case, the probability of a further reduction in the rate will be reduced to zero. Moreover, the regulator may raise it by 25 basis points in 2020. Otherwise, this issue will remain hanging in the air, exerting background pressure on the US currency.
The material has been provided by InstaForex Company - www.instaforex.com