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18.09.202011:19 Forex Analysis & Reviews: Is the strengthening of the dollar a planned surprise from the Fed?

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Exchange Rates 18.09.2020 analysis

After the Fed's next meeting, traders and analysts do not stop talking about the current actions of the regulator, which were both expected and unpredictable. As a result, the market is a little disappointed with the Fed's decision to keep the previous rate and not expand the asset purchase (QE) program, nevertheless, it is quite satisfied with what is happening.

The USD bears took the main blow after the regulator's decision. The US currency significantly strengthened after the comments of Jerome Powell, Fed's Chairman, although the strong dollar was not very satisfied with the US monetary authorities before. According to Bloomberg analysts, the regulator did not meet the optimistic expectations of the ''bears" for the USD and disappointed the market with some disagreement in its ranks. It can be recalled that two representatives of the FRS spoke out against the current policy of the Department, that is, maintaining ultra-low rates until 2023.

Moreover, the Fed's refusal to increase the purchase of assets (QE) caused the investors and traders to be disappointed. The regulator's statement emphasized that the QE program will continue, but is unlikely to exceed the current level ($ 80 billion in Treasury bonds and $ 40 billion in mortgage bonds) per month. Nevertheless, investors were expecting a gradual transition to buying long-term securities in the near future.

The current situation helped the US currency to strengthen, and this fact can be called a planned surprise from the Fed. The monetary authorities were not going to let the dollar decline sharply, on the contrary, they were trying to keep both the national economy and the USD afloat. Here, inflation is the determining factor for economic growth in the US. Next year, the Fed expects it to grow to 1.7%, and intends to keep interest rates at 0.1% until 2024.

This situation indicates a possible rise in the real negative rate to 1.6% in 2021 from the current 1.2%. This is a worrying signal for the US currency, as negative rates force market participants to buy high-yield assets. At the moment, it is steadily gaining momentum, actively competing with the Euro in the EUR/USD pair. Today, the mentioned pair is trading near 1.1854-1.1855, aiming to enter an upward turn.

The Fed's confident actions supports the US currency. The regulator practically did not change its current strategy, emphasizing that it plans to continue it over the coming years. Experts wonder why this took the markets by surprise if the Fed's actions were largely in line with expectations. Most likely, it is a matter of excessive illusions between the desired and actual result.

Many investors believed the Fed was preparing to create the right conditions for further monetary easing. Therefore, when the regulator announced the preservation of the previous plan for the purchase of assets, the market reacted as if it was faced with a sharp tightening of monetary policy. This reaction is similar to the resentment of a child who was robbed of candy. According to analysts, the unmotivated "resentment" of some market participants confused the rest.

Experts explain the lack of drastic changes in the Fed's strategy by fairly positive economic data from the United States. In such a situation, experts emphasize additional cash injections are inappropriate. They believe that the inflation targets set by J. Powell before a possible surge, met the current requirements.

Earlier, he said that rates will remain at the same level as long as the employment rate in the US does not reach the maximum (about 4.1%), and inflation does not return to the target of 2%. The Fed stressed that interest rates in the United States will be at zero, and the dollar will be in high positions until the national economy reaches an almost ideal state.

Larisa Kolesnikova
Analytical expert of InstaForex
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