Today is the most important day of the week for the major dollar pairs. At the end of the US session on Wednesday, we will learn the verdict of the US Federal Reserve, whose members will either put pressure on the US dollar or provoke a rally. The major currency pairs stood in place ahead of this event, not daring to play ahead of the curve. The EUR/USD pair is no exception here: traders have been trading in the range of 1.2100-1.2150 for the last few days, showing increased intraday volatility, but at the same time, actually remaining in one place.
The indecision of market participants is quite understandable, given the importance of the June meeting. After all, this is the Fed's first meeting after the inflation data, which reflected the record growth of US inflation in April and May. Many members of the Federal Reserve have already commented on the April release, but none of them did for the May figures in conjunction with the previous publication of the CPI and relatively good, although contradictory, Nonfarm. This is because the latest inflation data came out during the 10-day "silence mode" of the regulator before the meeting. Therefore, the intrigue regarding the results of the June meeting remains, putting pressure on both bears and buyers of EUR/USD.
On the one hand, there is no doubt that the interest rate will remain at the same level today. The volume of asset repurchases is also likely to remain unchanged. Investors' main attention will be focused on assessing the future prospects of monetary policy. In other words, traders are waiting for an answer to the main question: does the record growth in inflation, which has been observed for two months, threatening to overheat the economy? And is the Fed ready to respond to the latest releases with an early QE pullback? The head of the US regulator has repeatedly promised to inform market participants about the planned changes in advance. Given the inflationary dynamics, many traders and experts concluded that this will happen at the June meeting without specifying a specific date, while the first steps to normalize monetary policy will be taken by the Fed in August or September.
These are the general expectations of the market. They are quite optimistic, given the fact that most representatives of the regulator have voiced "dovish" rhetoric over the past weeks. In this case, the US dollar may become a victim again of inflated expectations.
It is clear that inflation indicators are showing record growth, strengthening the "hawkish" hopes of traders. However, the representatives of the "dovish" wing of the Fed were cool about the April release. According to them, the growth in inflation is temporary and is also due to the low base of the last year. So, the Central Bank can assess the May figures with the same tone.
As for the labor market, not everything is so smooth. Based on the recent data, the number of people employed in the non-agricultural sector rose by 559 thousand, while experts expected that almost 700 thousand jobs should have been created in the US last month. In the private sector of the economy, the number of employees increased by 490 thousand, while the forecast was at the level of 600 thousand. There was also an increase in the number of people employed in the manufacturing sector of the economy. The share of the economically active population has also declined. Some experts believe that the crisis is observed primarily in the supply of labor, rather than in the demand for it. However, the fact remains that the US labor market is still vulnerable, despite signs of recovery.
It is worth recalling several statements made by the Fed representatives before the meeting today. In particular, Jerome Powell has repeatedly stated that the regulator will allow the economy to "overheat" and will not resort to retaliatory measures. His colleague, Christopher Waller, said in one of his speeches that the Fed members would "only welcome" the excess of the 2% inflation rate. The CEO of the Federal Reserve Bank of Boston, Eric Rosengren, said in May that it was too early to talk about phasing out QE. In his opinion, inflationary growth will be temporary. At the same time, he was skeptical about the opinion that inflation could become a problem for the US economy. Similar rhetoric was voiced by other Fed representatives.
The Fed's consolidated position is that the current growth of key indicators is temporary, so the Fed is obliged to maintain its presence for a long time.
At the same time, some representatives of the US regulator voiced more "hawkish" rhetoric, provoking the strengthening of the US dollar throughout the market. In particular, the Head of the Federal Reserve Bank of San Francisco, Mary Daly, said that the FRS is at the initial stage of discussing how and when to start scaling back large-scale stimulus. Here, we can assume that Daly has done the dollar a disservice by providing a reason for "hawkish" expectations.
In general, the US regulator is expected to disappoint dollar bulls today. The Fed will be very careful in its wording and accurate in its estimates, but it also will make it clear that it is too early to talk about reducing the pace of QE. Fed members can argue their position with contradictory Nonfarm data and the temporary nature of the growth of inflation indicators. In this case, the US dollar will be under the strongest pressure, and buyers of the EUR/USD pair will be able to settle again within the area of 1.22.
However, traders are advised to stay out of the market at least until the end of Jerome Powell's press conference. Such periods are characterized by impulsive and often false price movements, which are based only on the emotions of market participants.
