30.07.202009:25 Forex Analysis & Reviews: July Fed meeting: pumping money, Powell's pessimism and link to coronavirus

Extending the validity of swap lines, linking the prospects of monetary policy to the situation with the coronavirus and pessimistic assessments of the recovery of the US economy are the main messages of the July meeting of the Federal Reserve, the results of which were announced last night. The US central bank did not support the national currency, although the dollar index showed a relatively small decline. The market was ready for the dovish mood of the central bank, so the dollar index remained within the 93rd figure (the low was marked at 93.170). Currency pairs of the so-called major group also reacted very modestly, and the dollar even tried to regain some of the lost positions during the Asian session on Thursday.

Nevertheless, despite the market's restrained reaction, the fact remains that the results of the Fed meeting were not in favor of the US currency. Therefore, the dollar's current correction should be treated accordingly. Apparently, traders took profits, also following the principle of "buy on rumors, sell on facts". However, in the medium term, the dollar will only receive short-term support from Congress, which is currently debating a bill for additional assistance to the US economy worth a trillion dollars. While the dollar bulls can not count on the Fed: the central bank has taken a defensive position, continuing to pump markets with liquidity. In addition, by linking the prospects for monetary policy with the prospects for the spread of the COVID-19 epidemic in the US, the Fed has increased the vulnerability of the US currency.

However, everything in order. Let's start with the "neutral-positive" side of yesterday's meeting. As a result of the July meeting, the central bank expectedly left all the parameters of monetary policy unchanged, thereby justifying market expectations. At the same time, Fed members said they did not expect a rate hike until the end of 2022. Also, negative rates were not discussed, and Fed Chairman Jerome Powell did not talk about plans to introduce control over the bond yield curve. At the same time, he noted that in recent months, the US economy began to gradually recover, although key macroeconomic indicators are still lower than before the coronavirus crisis. In addition, the Fed noted an improvement in financial conditions (primarily on the stock market).

This is the list of positive aspects of the July meeting, perhaps, exhausted. All other theses put pressure on the dollar to one degree or another.

Firstly, the Fed again voiced the already familiar phrase that it is ready to use all available tools to support the American economy. The QE program will be implemented in current volumes (some experts admitted its reduction the day before), one-day and urgent REPO operations will also continue.

Secondly, the regulator decided to extend the validity of swap lines with foreign central banks – at least until the end of March next year, thereby pumping markets with liquidity. Let me remind you that the decision to open swap lines was made in April, on the wave of crazy excitement around the dollar. This excitement has faded by the beginning of summer, but the Fed continues to "supply" the currency to the markets.

Third, Powell stated that there are disinflationary risks. According to him, very low demand in such sectors of the economy as tourism and hospitality, which were most affected by the coronavirus crisis, restrained consumer prices, so overall inflation is now much lower than the target two percent level. At the same time, Powell admitted that the regulator will have to deal with deflationary pressure for "quite a long time". Thus, he made it clear that the ultra-soft conditions of monetary policy will continue for a long time.

Fourth, the Fed has hinted quite transparently that the prospects for monetary policy will depend on how the coronavirus situation develops. According to Powell, the pandemic will seriously affect the US economy in the near future - primarily in the labor market. According to his estimates, the recovery of the US labor market will be "long and difficult". At the same time, he noted the significant role of the state's fiscal policy. This remark is a "stone in the garden" of congressmen who are delaying the adoption of a bill on additional support for the US economy.

Therefore, the Fed voiced rather pessimistic assessments at the July meeting, linking the prospects of monetary policy with the prospects of a pandemic. Fed members also noted that they will take into account labor market indicators, inflation and inflation expectations, financial and international conditions. In other words, dollar bulls will continue to focus on medical reports on the increase in the number of infected people in the US, as well as key macroeconomic reports (Nonfarm payrolls, inflation, wages).

If we talk directly about the EUR/USD pair, then here we see a failed assault on the 18th figure. This is bad news for buyers of the pair. The good news is that the bulls were able to overcome the resistance level of 1.1750 (the lower limit of the Kumo cloud on the monthly chart). Now the pair is undergoing a correction – quite logical behavior of the market after such a rapid multi-day growth. Therefore, it is advisable to open longs after overcoming the 1.1800 mark – to the next resistance level of 1.1850 (the upper line of the Bollinger Bands indicator on the daily chart).