empty
 
 
You are about to leave
www.instaforex.eu >
a website operated by
INSTANT TRADING EU LTD
Open Account

21.02.201911:10 Forex Analysis & Reviews: EUR / USD. Market underestimated Fed pigeon protocol

Long-term review
This information is provided to retail and professional clients as part of marketing communication. It does not contain and should not be construed as containing investment advice or investment recommendation or an offer or solicitation to engage in any transaction or strategy in financial instruments. Past performance is not a guarantee or prediction of future performance. Instant Trading EU Ltd. makes no representation and assumes no liability as to the accuracy or completeness of the information provided, or any loss arising from any investment based on analysis, forecast or other information provided by an employee of the Company or otherwise. Full disclaimer is available here.

The Fed's protocol was published yesterday. Despite its pigeon character, the protocol only had little impact on the dynamics of dollar pairs. First, market participants were ready for pessimistic assessments by the regulator. The previous speeches of the Fed representatives prepared the ground for an adequate perception of soft rhetoric. Second, the Federal Reserve noted during its January meeting that the US economy is in good condition, and the slowdown in monetary policy tightening is primarily due to uncertainty about future prospects, where the main risks come from China and Europe.

Exchange Rates 21.02.2019 analysis

As a result of this release, the euro / dollar pair showed, at first glance, an inadequate reaction - instead of the expected growth, the price dropped to the base of the 13th figure. In my opinion, the southern price pullback is quite understandable and justified. The market was too "screwed up" by the fact that the Fed takes a too soft position - to the extent that it will announce the end of the rate-raising cycle with direct text. But nothing extraordinary happened, the regulator reflected the main points of the January meeting, specifying only its position in a more detailed form. As a result, the market followed the rule "buy on rumors, sell on facts", which was the reason for the "inadequate" behavior of the couple.

In fact, the Fed gave no reason to strengthen the dollar. By and large, the regulator recognized that the rate has already reached the lower limit of the neutral level: according to some fed members, raising rates may be necessary only if inflation exceeds basic forecasts. However, most of them stated that the inflationary pressure is weakening, and this year's trend may continue. Some members of the Committee believe that the core inflation will be below the target of two percent for a long time, and this fact will be the main reason for the wait-and-see approach to the parameters of monetary policy.

Such a formulation is quite alarming for dollar bulls. It is worth recalling here that the US consumer price index in annual terms moved slowly since November of last year, having gone from 2.5% to 1.6% in January. On a monthly basis, the indicator for three months ranges from -0.1% to zero. Core inflation is also not happy with success: since November 2018, it has been going out at the same level — 0.2% (m / m) and 2.2% (g / g). A disturbing factor is the fact that the growth in the level of wages in January has significantly decreased - to 0.1%. Such dynamics can negatively affect inflationary growth, taking into account all other constraining circumstances (in particular, the volume of retail sales in the USA is decreasing at the maximum rate over the last nine years).

Exchange Rates 21.02.2019 analysis

In other words, in the foreseeable future , one should not expect any inflationary breakthrough. At best, key indicators will fluctuate in the area of current levels. This means that the Fed will not change the parameters of monetary policy over the next six months. According to a number of experts, the regulator will have to wait until 2020. If the situation won't not change for any better next year, it may even reduce the rate by 25-50 basis points. In my opinion, it is still too early to talk about such a scenario. But now, it can be said with confidence that until September of this year; one should not expect decisive action from the Fed.

In addition to the prospects for monetary policy , the members of the Federal Reverse raised another burning issue. We are talking about reducing the rate of folding the balance of the Fed. According to the officials, the volume of reserves may approach its "adequate level" this year. However, no decisions were made on this matter. The regulator said that at one of its subsequent meetings, the Central Bank will announce plans to stop the process of reducing the size of the balance.

Thus, yesterday, the market clearly underestimated the significance of the published protocol. His main thesis suggests that the rate will be increased only in exceptional cases - for example, if inflation rushes sharply upwards. However, there are no prerequisites for this; therefore, a rather obvious conclusion is being made that for many months (and possibly by the end of the year), the Fed will take a wait-and-see attitude.

Exchange Rates 21.02.2019 analysis

From the point of view of technology, the situation has hardly changed since yesterday. The EUR / USD bulls were able to hold above 1.1305 (Tenkan-sen line) and did not lose their growth potential. Now, their task is to overcome the resistance level of 1.1390 (the lower boundary of the Kumo cloud on the daily chart). Bears of the pair still need to fix below 1.1270 - in this case, the Ichimoku indicator will form a bearish Parade of Lines signal, and the price itself will be between the middle and lower lines of the Bollinger Bands indicator on the same timeframe. And although such a deep southern pullback is not excluded, the priority so far remains behind the northern movement, given the prevailing fundamental picture of the pair.

Irina Manzenko
Analytical expert of InstaForex
© 2007-2024

Open trading account

InstaForex analytical reviews will make you fully aware of market trends! Being an InstaForex client, you are provided with a large number of free services for efficient trading.




You are now leaving www.instaforex.eu, a website operated by INSTANT TRADING EU LTD
Can't speak right now?
Ask your question in the chat.

Turn "Do Not Track" off