23.09.202111:15 Forex Analysis & Reviews: Fed calmed the markets and will begin to reduce incentives

On Wednesday, investors finally waited for the results of the meeting of the US regulator, its plans for the next six months, and its forecasts for the development of the situation in the national economy for the next several years.

Initially, the world business media evaluated the tone of the Fed Chairman's speech as "hawkish", but we disagree with this and believe that it was actually a compromise.

The Fed took the lead, which was something that investors generally did not expect. Nevertheless, they have already fully played this topic earlier, announcing a decision to gradually reduce the volume of asset repurchases – government treasury bonds and corporate mortgage securities with a complete cessation in the middle of next year. This was the end of all the "hawkishness". Moreover, Powell said that, despite the decision to reduce the volume of asset repurchases, monetary policy still remains soft amid slowing economic growth in the country, the situation on the labor market, and the state of inflation, as the regulator's forecasts for the coming years were presented. This signal is important and was regarded by the market as positive for the resumption of demand for risky assets with a simultaneous weakening of the US dollar.

The US stock market increased on the basis of Wednesday's trading. According to the dynamics of futures, the same for the stock indices at the opening in Europe. Asia also ends trading in the "green" zone. Against this background, the US dollar remains under pressure against a basket of major currencies, despite the increase in the yield of 2-year notes sensitive to changes in rates. At the same time, the yield of the benchmark 10-year treasuries shows a modest upward trend.

Assessing the prospects for the Fed's monetary policy, it can be assumed that the stock market will try to recover, but the probability of testing the recent highs of stock indices in America remains in question. It is likely that we will observe high volatility until large investors decide for themselves what to do in the new reality. A similar picture may also be forming in the currency markets in the near future.

Forecast of the day:

The USD/CAD pair declined amid rising crude oil prices and a weakening dollar following the Fed's monetary policy meeting. A price consolidation below the level of 1.2720 may become the basis for the pair's further decline to 1.2580.

The AUD/USD pair may rise to 0.7335 against the background of improving sentiment on world markets, growing demand for commodity assets, and an increase in the Chinese stock market.