17.06.202114:05 Forex Analysis & Reviews: FOMC's hawkish mood will not change the long-term outlook of the US dollar. Overview of USD, EUR, GBP

The Fed's new dot chart showing that the average view of Fed members suggests two rate hikes in 2023, compared with no such plans in March (only 6 Committee members voted for the raise last month, now there was 13 out of 18), was an obvious hawkish surprise. The decision means a higher yield on Treasury bonds. It should be noted that the 10-year UST slightly rose by 1.57% on Thursday morning against 1.50% on Wednesday morning.

The Fed's economic forecasts have remained largely unchanged, except for a significant upward revision of core inflation PCE this year (from 2.2% y/y to 3%). The changes are consistent with the Fed's position that the current inflationary changes are temporary, as inflation is projected to decline to 2.1% in 2022 and 2023. At the same time, the forecasts for the unemployment rate are almost identical to those in March (4.5% at the end of 2021, 3.8% at the end of 2022), even though GDP growth this year was revised from 0.5% to 7%.

The change in the Fed's position, although partly unexpected, is still logical, since it is no longer possible to pretend that these processes are temporary after the last inflation report. Thus, some reaction was needed, even if it was maximally shifted to the future.

The Fed forecasts a rate hike in 2 years, although some new strain of coronavirus can completely change all forecasts literally overnight if existing vaccines against it are ineffective. Accordingly, it is also quite frivolous to expect that the Fed will maintain its forecast, but we do not need this – it is enough that the players will form their reaction, and based on the reaction of investors, it will be possible to predict the direction in the currency market.

With regards to the current $ 120 billion bond purchase program, the Fed Chairman literally said the following at a press conference: "We adhere to a meeting by meeting principle to assess progress, which is still far away." This means that purchases will continue, they will be discussed at every meeting, and, their pace will most likely not decrease until the end of the year.

In conclusion, the change in the forecast for rates led to an increase in the value of the US dollar, but maintaining the pace of asset purchases in the same volumes returns the status quo. After all, a hypothetical rate hike is still 2 years away, and the markets will continue to pump up liquidity. Collectively, this will strengthen the USD in the short term, but long-term trends are unlikely to be adjusted until they are supported by a reduction in bond purchases.

It is worth noting that the US dollar is strengthening across the entire currency market on Thursday, but so far, the movements have not gone beyond the established ranges, that is, we are technically seeing a correction, not a trend reversal. In favor of this conclusion, the reaction of oil, which slightly fell within the correction, does not have a strong movement.

The channel border for the EUR/USD pair is approximately in the zone of 1.1910/30. That is, the euro declined near this border. And since it is assumed that the market's reaction will be short-term, we can try to buy in the indicated zone with the target of 1.25, and stop just below the level of 1.1910.

The pound will try to find a base above the 1.39 level. The trend is bullish and there are weak signals for the formation of a bearish reversal. For example, the weekly RSI has formed a divergence, but in general, the technical picture has no signs of a reversal. From a fundamental point of view, the pound remains the favorite. The probability of moving to the local high of 1.4380 is higher than a downward correction to the nearest strong support level of 1.35.