16.03.202117:38 Forex Analysis & Reviews: EUR/USD Growth Difficulties: Fed is likely to leave policy unchanged

The greenback started the current week with growth in relation to most of its main competitors, having strengthened almost 0.2% the day before.

On Tuesday, the dollar lost some of its earlier points amid the retreat of 10-year Treasury yields below 1.60%.

The USD is still facing serious resistance around 92 points.

Meanwhile, the EUR/USD pair is trying to stabilize amid positive statistics from Germany, taking advantage of the fact that US yields are taking a breather.

However, this situation may be temporary.

The Fed will announce its interest rate decision on Wednesday.

Since no major changes in the monetary policy of the regulator are expected, the attention of market participants will be focused on the economic forecasts of the Central Bank, which were last updated in December, but much has changed since then.

Many quarantine restrictions in the United States have been relaxed because over 20% of the population has received at least one dose of the COVID-19 vaccine.

Obviously, the outlook for the US economy has improved significantly, and the Fed's estimates should reflect this. Growing price pressures should lead to a revision of consumer inflation forecasts.

In addition, investors are interested in the following questions: are Fed officials worried about the recent surge in Treasury yields? and; how the dotted chart of interest rates will change?

US Federal Reserve Chairman Jerome Powell and his colleagues made it clear in their recent comments that rising yields are not a problem for the regulator, as they reflect an improved US economic outlook.

It is unclear how long the FOMC will be able to remain calm if this dynamic continues.

Even if the Fed continues to play down the importance of rising yields, the dot plot is likely to be adjusted. This, along with revised economic forecasts, should give the dollar a boost to growth.

Thus, even if a period of temporary weakness awaits the US dollar, there is reason to believe that this drawdown will be redeemed rather quickly.

"We regard the recent weakening of the dollar as profit-taking and consolidation. We believe that the USD index is still ready to test the high of November 23 at 92.80 points and further - the high of November 11 at 93.20," said Brown Brothers Harriman.

"In the longer term, a breakout of the 92.63 area could target the dollar bulls to test the September high around 94.74," they added.

If the greenback continues to strengthen, the main currency pair will become the main candidate for correction.

The contrast between the Eurozone and the United States in everything from monetary policy to economic outlook and vaccination programs is very strong, which is a big problem for EUR/USD.

Last week, the ECB announced its intention to accelerate the pace of asset repurchases, and this week began with a string of negative news from the coronavirus front. Many European countries have suspended COVID-19 vaccination with AstraZeneca.

This news came exactly at the moment when the Italian authorities introduced new restrictions, and the head of the German Ministry of Health announced the beginning of the third wave of the epidemic.

Meanwhile, in the USA, the rate of vaccination is increasing, and the number of cases is decreasing.

On Tuesday, the EUR/USD pair is trading in a narrow range, fluctuating within 40 pips.

According to the ZEW Institute, the index of economic sentiment in Germany in March rose to 76.6 points compared to 71.2 points recorded in February, and against the preliminary estimate of 74 points.

Against this background, the EUR/USD pair rose above 1.1950 but then rolled back.

Investors prefer to remain cautious ahead of the March Fed meeting.

To determine the direction, the main currency pair must break through 1.1885 or 1.1970.