21.09.202110:50 Forex Analysis & Reviews: Fed's decision on monetary policy may be a compromise

The Fed's two-day meeting on monetary policy begins today. Financial markets have been fixated on this for the last two weeks, which was fully manifested in the form of a correction in the stock markets, a local strengthening of the US currency, and increased high volatility.

In fact, investors focused all their attention on any signals from the Federal Reserve regarding the prospects for changes in monetary policy. If everyone has already "accepted" the start of narrowing the volume of asset repurchases – corporate mortgage securities and government Treasury bonds, then the existing complete uncertainty of further actions, and this means the beginning of the process of raising interest rates, leaves the possibility of interpreting the likely development of events.

If we talk about the process of reducing the volume of asset repurchases, then not only the volume but also the pace is very important. If the regulator, represented by its leader J. Powell, makes it clear that the volume will decrease smoothly and gradually, and this process will be spread out for a long time and can be adjusted in the direction of suspension if needed – this will undoubtedly cause a reversal of positive mood in the markets and a resumption of demand for risky assets with a simultaneous downward correction in the US dollar.

At the same time, if the Fed sets specific deadlines, linking them with the volume of cuts, this will undoubtedly be regarded by investors as a direct path to the next step – the beginning of the process of raising interest rates. What makes the markets nervous is the publication in the second half of the year of traditional forecasts on the expected level of interest rates for the next 2-3 years, inflation, and the state of the labor market. If everything points to expectations of high inflation, normalization of the labor market in the near future, and a specific upward trend in interest rates, this will undoubtedly cause a strong blow to the American stock market and the world as a whole. This will also lead to the continuation of the dollar's growth in the currency market.

The second scenario is the most radical and minimally realistic. According to the latest data, the rate of inflation growth has slowed down, and it has slightly adjusted downwards. Secondly, the latest published data on the number of new jobs for the month of August turned out to be shocking and fully showed the lack of positive dynamics, which is a strong and stable obstacle to a sharp change in the Central Bank's monetary rate.

Therefore, we adhere to the probability that the solution will be a compromise. On the one hand, the regulator will begin to reduce the volume of asset repurchases, but it will do it smoothly. It will express its satisfaction with the slowdown in the growth of inflation, and the forecasts for inflation, the labor market, and rates will be more relaxed. Such a position will definitely lead to an increase in positive sentiment in the markets with all the ensuing consequences.

Forecast of the day:

The EUR/USD pair has started to recover from its recent decline. A consolidation above the level of 1.1725 will lead to its further growth to 1.1800.

The USD/CAD pair turned down amid the resumption of growth in crude oil prices and the closure of long positions in the US dollar ahead of the Fed's monetary policy meeting. The price dropped below 1.2780 and may most likely continue to fall to 1.2625.