09.09.202110:35 Forex Analysis & Reviews: Will Powell and the Fed calm the currency markets?

Negative sentiments, which completely started on Tuesday when American investors returned to financial markets after a long weekend, continue to dominate the world markets today ahead of the European Central Bank's monetary policy meeting.

The fall in stock indices both in the Asia-Pacific region and in Europe and America is associated with new forecasts of a reduction in US GDP amid a slowdown in economic growth, where the difficult situation on the labor market plays the main negative factor. According to a JOLTS report released on Wednesday, jobs rose to a record high in July. Job vacancies surged to a new high of 10.9 million.

There is a paradoxical picture in the labor market. The number of job offers is increasing, while employment is decreasing. The reasons that shape this condition remain the same – the pressure from the COVID-19 pandemic and the availability of benefits that allow low-income workers to be parasites. This problem was already mentioned several times before. If no one is able to stop the pandemic, then the current authorities do not want to supply the US population with "helicopter" money for political reasons.

Additional negativity that shakes financial markets is the exaggeration in the halls of the Fed regarding the topic of the beginning of the reduction of incentives. The members of the Central Bank continue to consider the option of starting this process in the fall of this year. In the wake of such prospects, other world central banks, such as the ECB, the Bank of England, or the Central Bank of Japan, are unlikely to remain on the sidelines, which will cause great damage to the demand for risky assets. The prospects for such events will definitely lead not only to a temporary correction in the markets but to their collapse.

In such conditions, there will be a withdrawal of investors from risk, expressed in purchases of protective assets – the dollar, the yen, the franc, as well as government bonds of economically strong countries and, of course, gold, which is now under pressure due to the appreciation of the US dollar, which is strengthening on its historical right of the world reserve currency.

What can be expected today from the result of the ECB meeting?

We believe that nothing special will happen. The regulator will keep the parameters of its monetary policy – interest rates and the volume of stimulus measures, but after the meeting at his press conference, the chairman of the bank, C. Lagarde, may make it clear that the regulator, following the Fed, may also begin measures to reduce stimulus measures. The ECB itself will not dare to start before the US Central Bank, whose behavior is decisive in our time.

How will the euro react to the outcome of the ECB meeting?

If neither the bank nor Lagarde talks about the topic of changing the monetary policy rate in the near future, the euro will be under strong pressure, which is already present in the wake of investors' withdrawal from risky play and the growth of the dollar rate on this wave. At the same time, if a signal is given about the high probability of a reversal of the monetary policy rate from a soft to a harder one, this may locally support the euro exchange rate.

Observing the current market condition, we believe that only the signals from the Fed and personally J. Powell can stop the decline in the stock markets and the strengthening of the US dollar. However, it is still uncertain whether this will happen.

Forecast of the day:

The EUR/USD pair found support at the level of 1.1810 ahead of the ECB's monetary policy decision. If a signal is given at the end of the meeting about the regulator's long-term plan to move towards tightening monetary policy, this will support the pair, and it may rise to the level of 1.1900 by the end of this week.

The GBP/USD pair found support at the level of 1.3750. Its growth can be supported by the ECB decision, as the Bank of England may have the same in the future. Against this background, the pair will rush to the level of 1.3870.