23.02.201805:21 Forex Analysis & Reviews: The Fed's report and the ECB's report: information bubbles

Three or four? This issue in the foreign exchange market is gradually becoming rhetorical: traders and experts are arguing about how many times the Fed will hike the rate this year and what circumstances would help/prevent members of the US central bank. The main macroeconomic indicators or comments are considered exclusively through the prism of the prospects for monetary policy, and Wednesday's minutes of the Fed's January meeting was no exception.

It is worth noting that if it were not for the collapse of the stock market in early February, Wednesday's publication of the Fed's minutes would have remained almost unnoticed. This document has actually lost its relevance due to many circumstances. First, the January meeting was chaired by the former head of the department, and secondly, this meeting was held before the release of key inflation indicators (and not only), and thirdly, before the February events in the US stock market.

Despite the nuances mentioned above, traders eagerly awaited this protocol, expecting to see some signals. The banal fear (or expectation) of a new collapse of the Wall Street index increased the significance of the "minutes", although their value for the fundamental background was minimal.

Actually, the minutes itself turned out to be really impersonal: on the one hand, the regulator recognized the obvious fact of improving forecasts for the growth of the US economy, on the other hand, it did not give up the need for "gradual tightening of monetary policy." In other words, regarding the four rate hikes this year, it was not even a hypothetical plan. The base scenario (three hikes) is still valid, and it seems that this fact caused a temporary increase in the yield of 10-year bonds (the peak was at 2.952), after which the dollar almost "forcedly" went up all over the market.

However, during the European session on Thursday, the Treasury yield went down. Thus, the market recognized the obvious fact: there are no objective reasons for the dynamics of growth. Within the framework of the general correctional movement, the dollar received a weak excuse for its strengthening, and it made use of it. But to speak now about any significant change in the fundamental background is somewhat futile.

A similar "information bubble" was the ECB's latest report on monetary policy. The rhetoric of the minutes of the January meeting of the European Central Bank turned out to be contradictory and in fact useless for traders. The regulator announced two opposing messages.

The first is that the ECB can still begin adjusting its formulations, thereby toughening the general rhetoric. However, the second message warns that the bank will "avoid sharp changes in the verbal nature," as the Central Bank is closely monitoring the appreciation of the European currency. By and large, the report includes two sentences, which contradict each other.

On the one hand, the ECB does not rule out tightening its rhetoric earlier this year (and thereby supports the euro), but, on the other hand, recognizes that the growth of the single currency is preventing the Central Bank from moving towards its goals. This "diplomatic genre" is inherent in Mario Draghi, and at least on Thursday he has achieved his goal - he maintained the balance sheet and did not strengthen the euro, as the market actually ignored this report.

Thus, the minutes of the Fed's January meeting and a similar report of the ECB could not affect the dynamics of the euro/dollar pair. The price remained above the key level of 1.2205 (the bottom line of the Bollinger Bands indicator) and currently shows growth, returning to the 23rd figure. This is primarily due to the continued decline in the yield of US bonds against a background of a half-empty economic calendar.

In general, the euro-dollar pair remains in limbo. The main trade battles are expected next week, when we hear the new head of the Fed, Jerome Powell, in the Senate. His position on many issues will pay a great deal of attention to details, especially with respect to the prospects for accelerating the pace of hiking the rate. The speech of Powell will be held next Wednesday, February 28. Also in the US, the release of indicators of income and expenditure of Americans, as well as other important indicators.

Until then, the eurusd pair, most likely, will be in a flat state, between the 22nd and 23rd figures. In order to develop the upward movement of the bulls, the pair needs to break through and consolidate above the level of 1.2395: this is the middle line of the Bollinger Bands indicator on D1, which coincides with the Tenkan-sen and Kijun-sen lines. In this case, the Ichimoku indicator Kinko Hyo will form a bullish "Line Parade" signal, opening the pair to the next resistance level - 1.2535. This is a long-term price high, coinciding with the upper line of the indicator Bollinger Bands. This target pair has tried to test last week, but to no avail. Therefore, it is obvious that for a retest of this level, a fairly powerful information is needed.

Irina Milosevic