01.02.201900:51 Forex Analysis & Reviews: EUR/USD: Fed, Huawei and weak Europe

What traders talked about for so long has happened: the US Federal Reserve officially took a "dovish" position on the prospects of monetary policy. And although this fact was widely expected in the financial world, too strong a contrast to the recent actions of the Fed made itself felt – the dollar is cheaper throughout the market.

Here it should be emphasized that the US regulator could choose a softer scenario, increasing turbulence in the currency and stock markets. We are talking about the Fed reducing the pace of the balance-sheet unwind. Jerome Powell decided to act gradually and not to "cut from the shoulder", saying that further adjustment of the balance sheet is likely to happen after the next decision on the interest rate. Nevertheless, the Federal Reserve has made certain steps in this direction: first, the regulator removed the balance assessment from the accompanying statement, and secondly, Powell confirmed at a press conference that he was ready to calibrate the balance.

In general, the text of the accompanying statement has undergone many changes. The key point is to remove the phrase of further gradual rate hikes. This wording was included in the text of the statement at the very beginning of the monetary policy normalization cycle, so its withdrawal is a significant event for the foreign exchange market. Moreover, instead of this phrase, the word "patience" appeared in the text, which was repeatedly voiced during the press conference of Jerome Powell.

Another important point is the Federal Reserve's assessment of the current situation in the country's economy. The regulator assessed the growth rate of economic activity as "decent", although earlier he spoke about "strong rates". In other words, this step is a step lower, from which we can draw the appropriate conclusions. According to the accompanying report, the labor market showed positive dynamics against the background of increasing household expenditures, while the industrial sector reduced the rate of investment in fixed assets.

During his press conference, Jerome Powell confirmed the main points of the Fed's accompanying statement. He said that there are no sufficient arguments to raise the rate in the near future – and the prospects of monetary policy will depend solely on the incoming data. Inflation will play a key role here, which has been showing weak results recently. Also, according to the head of the Fed, the US economy will grow "slowly but surely", as the financial conditions have become less favorable for dynamic growth. Summing up, Powell said that the regulator will soon take a wait-and-see and patient position. Experts disagreed about the future prospects of monetary policy – according to some currency strategists, the Fed will raise the rate only in December, while others believe that the regulator will take a break until 2020.

In response to the results of the January meeting, the dollar index impulsively plummeted to the level of 94.8 points, and the US currency fell to 1.1510 against the euro. However, the bulls of EUR/USD hardly manage to keep the price within the 15th figure, as European macroeconomic data also came out in the "red zone" - in particular, the index of business confidence in the eurozone fell stronger than forecasts, and German inflation suddenly fell to 1.4%, setting an annual anti-record. Today, a block of macroeconomic statistics has also been released, and many figures have disappointed again. Thus, the eurozone GDP in the 4th quarter of last year slowed to 1.2% (in annual terms), and the Italian economy grew by only 0.1% yoy, showing a decline for the fifth consecutive quarter.

Thus, even the "dovish" meeting of the Fed did not allow the EUR/USD bulls to develop a large-scale attack. And the reason for this is not only weak European statistics, but also traders' concern about the prospects of US-China relations. Today, two-day talks are coming to an end, following which the US President is to meet with Vice Prime Minister of the state Council of China Liu He. These negotiations are taking place against the background of the scandal surrounding Huawei, whose director was detained on December 1 in Canada at the request of US authorities.

The US Prosecutor's office accuses her of 23 counts, including commercial espionage and violation of American anti-Iranian sanctions. Now the United States requested her extradition, provoking the anger of Chinese authorities. China considers all the accusations far-fetched and politically motivated. According to many experts, Washington really uses this situation as a lever of influence, but risks "going too far", disrupting the negotiation process. The results of today's meeting at a "high" level will make it possible to understand in which direction the pendulum of future US-China relations will swing.

Thus, if the risk of a resumption of the trade war increases again (the parties need to find a consensus before March 1), the dollar can regain its position, despite the results of the January Fed meeting. Bulls of EUR/USD need not only to hold the pair within the 15th figure, but also to overcome the resistance level of 1.1540 (the upper line of the Bollinger Bands indicator on the daily chart). In this case, the path to the boundaries of the 16th figure will be opened. The task of bears is to return the price to the Kumo cloud on D1 (that is, to the bottom of the 14th figure), "extinguishing" the upward impulse. Tomorrow might play a key role in this context, given the release of Nonfarm and key data on the growth of the European inflation.