28.07.202111:49 Forex Analysis & Reviews: What do the markets expect from Powell and from the Fed?

Investors continue to wonder what will the Fed do about the timing of the end of the super-soft monetary policy. The fact that it will not last forever is understandable, especially since there is a real reason for its correction amid the same reasons not to change it.

Let's start with the fact that the bank will not change anything at this meeting. The majority of market participants believe that all the parameters of monetary policy will be left unchanged. We also adhere to this opinion, which seems to us adequate in the current conditions. It is assumed that the key interest rate will be left in the range of 0.0%-0.25%. The volume of repurchases of government bonds and mortgage-backed securities is also unchanged.

Now, what will Fed Chairman J. Powell talk about at the press conference? He will most likely mention the negative impact of the consequences of COVID-19 on the country's economy. It will also discuss a painful issue – the weakness of the labor market again due to the unwillingness of Americans to go to work due to fear of contracting this disease. Nevertheless, he will try to be optimistic about the economic recovery and growth, but at the same time, he will certainly point to a strong increase in inflation, which turned out to be higher than expected and does not yet show a downward reversal.

What do the markets expect from Powell and from the Fed in the long term?

The market expects a clear signal about the timing of the beginning of the change in the monetary exchange rate. Everyone understands that the economic authorities of the country cannot just stop the "helicopter" money. They have already contributed to the inflation growth and the lack of desire of the mass of the population not to go to work, and this initially applies to the low-paid layers. All this indicates that it is necessary to stop conducting monetary issues, which will not lead to good. But on the other hand, the Fed's obligations to support economic growth remain in force, but based on the latest statistics, it has begun to slip. Here, virtual scales appear before the Central Bank – on one hand, there is high inflation with the risks of its accelerated growth and the parasitic lifestyle of the population with the help of the "helicopter" money, and on the other, the slowdown of the economy, a weak labor market, and the consequences of COVID-19.

It is difficult to make a choice in such a situation, but it seems that we will have to. Therefore, we expect Powell to still mention the topic of a prospective reduction in the volume of repurchases of government bonds and mortgage securities and the monetary exchange rate in general, but at the same time, he will try not to signal the real timing of the start of this process. We believe that the Fed and its chairman will want to take a break until the autumn and then really take some more decisive measures in the hopes that inflation will stabilize and begin to decline, as the regulator previously assumed.

To sum everything up, it can be noted that the parameters of the monetary policy after the meeting will remain unchanged for now. Personally, Powell will try to calm the markets at his press conference, as the regulator and his leader are firmly stuck with contradictions and obligations.

What should be expected in the markets?

This scenario will lead to a new wave of demand for risky assets, Treasury yields will decline again, putting pressure on the US dollar.

Forecast of the day:

The EUR/USD pair tried to break through the range of 1.1755-1.1815 in anticipation of the result of the Fed's monetary policy meeting. We believe that this result will still be negative for the US dollar. In this case, the pair will further rise to the level of 1.1850, and then to 1.1880.

The USD/CAD pair may decline to the level of 1.2435 after the results of the Federal Reserve meeting, as well as on the wave of rising oil prices if data on oil and petroleum products reserves in America show their decline.