20.06.201909:41 Forex Analysis & Reviews: EUR / USD: Fed reinstated the

The results of the Fed June meeting weakened the US currency as the dollar index fell by more than 100 points, while the yield on 10-year-old treasuries plunged to a 2 percent mark (currently 1.987%) for the first time since October 2016. Immediately after the announcement of the Fed decision, the US stock market indices showed moderate growth. The Dow Jones index rose 1.3% and the S&P 500, which includes 500 shares of the largest US companies, increased by 0.3%. Also, the NASDAQ e-exchange index climbed 0.35%.

In general, the Fed has met market expectations. Even before the press conference of Jerome Powell, the dollar weakened against a basket of major currencies as the text of the accompanying statement by the Fed carried the key messages. Thus, the regulator has excluded from the final communique a phrase about "showing patience". This formulation meant that the Fed is ready to take a wait-and-see attitude, maintaining the status quo for the foreseeable future. The deletion of this phrase suggests that the Central Bank is preparing to soften the parameters of monetary policy.

The point forecast of the Fed confirmed this assumption, however, the views of the regulator members are diverged on this issue. Eight members of the Fed spoke out for the rate cut before the end of the current year (and 7 of them predict two drops), while another 8 were in favor of keeping the waiting position. The last- 17th official of the Central Bank expressed an unusual idea in these conditions as they voted for a rate increase. The median forecast does not disclose the names of those who voted, so we can focus only on the previous rhetoric of the members of the regulator, assessing the balance of power in the Fed's camp.

Despite the separation of opinions, the market has already increased the likelihood of a rate cut to almost 100%. In this case, the Fed has again driven into the trap of its own assumption that the dollar will begin to grow again if the regulator does not follow market expectations. This puts pressure on US inflation, exports and industrial production. However, judging by the rhetoric of Jerome Powell, traders adequately assess the chances of easing monetary policy. The head of the Fed said that the regulator was forced to make "very significant" changes in the text of the accompanying statement as the recent events in the sphere of trade relations "significantly increased" the level of uncertainty, worsening the indicators of business confidence. Powell also responded to the latest releases of key macroeconomic data. In particular, the labor market remains strong in his opinion but recently, there has been increased uncertainty about its growth dynamics due to disappointing data regarding the increase in the number of employees. As for inflation, it also remains muffled according to Powell. Although, so far, it is near target levels.

Following the discussion, the members of the regulator worsened the assessment of economic activity, resorting to the "game of words." If earlier in the accompanying communique, the Federal Reserve noted the "steady rates" of growth in the American economy. Now, this wording changed to "moderate" rates.

Summing up, Powell hinted a rate cut: He said that the regulator would closely monitor economic prospects and respond "accordingly." He stressed that further actions of the Federal Reserve will be largely determined by the course of trade negotiations between the United States and China. Also, the focus of the regulator will be on key macroeconomic indicators.

This remark of Powell increases the importance of the upcoming G-20 summit. By and large, the fate of the Fed's monetary policy will largely depend on its outcome. It is worth noting here that, in addition to lowering the rate, the Fed can use the change in the volume of assets on the Central Bank's balance sheet as a tool for easing policy. Such a scenario did not rule out Jerome Powell himself, answering journalists' questions the other day.

Thus, the Federal Reserve predictably softened its rhetoric and guided the markets to a possible reduction in interest rates. Almost 100% probability of a rate reduction in July corresponds to the 80% probability of a double rate reduction by the end of the current year. This fact has a corresponding pressure on the dollar, including it paired with the euro. Despite the dovish remarks by Mario Draghi, the ECB's policy easing option is (so far) hypothetical, while the Fed seems to have decided on an algorithm for its further actions.