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The September Federal Reserve meeting passed without fanfare and did not bring any particular surprises.
As a result of yesterday's meeting, the FOMC left the monetary policy parameters unchanged and, despite some concerns, did not announce the start of a reduction in asset purchases.
Instead, Fed Chairman Jerome Powell only hinted that the central bank may decide to wind down QE in November and by the middle of next year, asset purchases will be reduced to zero.
However, even this hint was enough for the USD index to reach a monthly high, rising above 93.52 points, and the EUR/USD pair dipped to its lowest level since August 20, around 1.1688.
"Although Powell did not report on the timing of the start of the withdrawal of monetary stimulus, he said that there is broad agreement on the end of the QE rollback, which will end around the middle of next year. In our opinion, this is more important, since the countdown begins until the moment when the next increase in interest rates can occur," noted NatWest specialists.
At the moment, the derivatives market quotes a 50% probability of a rate hike in the US in October next year and a 100% probability of a 25 basis point rate hike in December.
Dollar bulls were encouraged by the fact that the number of FOMC members advocating a federal funds rate hike in 2022 has increased from 7 to 9. This balance of power suggests that at least half of the central bank leaders are thinking about moving to a tightening of the monetary exchange rate. shortly after the completion of bond purchases.
Against the background of improved risk sentiment, the greenback quickly retreated from the monthly peak and returned to the levels that were observed before the Fed announced its verdict on monetary policy.
Apparently, global markets breathed a sigh of relief, rejoicing at the postponement of the curtailment of monetary stimulus by the Fed.
In addition, concern for the fate of the Chinese real estate giant Evergrande has eased. The company announced its ability to pay interest on domestic bonds. There are also rumors circulating about the possibility of dividing the concern into three separate divisions by the Chinese government. However, so far all this is just rumors, and uncertainty persists.
The main question is how Evergrande is going to pay out coupons for $83.5 million. The payment on dollar-denominated bonds is more than twice the payment in yuan, and despite the 30-day grace period, skipping the payment can lead to a rapid fall in risky assets.
Therefore, investors are in no hurry to abandon the safe dollar, and the current decline in the US currency is considered only as a correction.
An immediate obstacle for the USD occurs at recent peaks near 93.50. A breakthrough above will lead to revisiting the 2021 highs recorded on August 20 in the area of 93.70. Further up is followed by the round level of 94.00 and the peak of November 2020 at 94.30.
"As soon as the dust settles after the September FOMC meeting, it seems that there are enough hawkish signals to keep the dollar higher, as the market expects an earlier than expected increase in the federal funds rate," Western Union analysts said.
Westpac strategists believe that the Fed's signals about the upcoming curtailment of QE should support the greenback in the short term.
"The FOMC has given a signal about the impending beginning of the curtailment of monetary incentives. In addition, the central bank's spot forecasts on rates reflected the evolution of the views of the Committee members. Now two more officials began to expect an increase in rates in 2022. Accordingly, now the votes in the Fed regarding the beginning of policy tightening next year are equally divided. Although USD is probably already slightly overvalued relative to the yield spread and may continue trading in the range of 92.00-94.00, the probability of a breakdown of the upper limit of this range is increasing," they noted.
Analysts at TD Securities believe that the US central bank will reduce its asset purchases by $15 billion a month starting in November, which will increase profitability in the US and strengthen the dollar.
"In the short term, there is a possibility of further strengthening of the greenback, which threatens the breakdown of the annual low of about 1.1664 in the EUR/USD pair," they said.
"If the yields of long-term US bonds move and rise sharply - either because of the news from the FOMC, or for other reasons - then the euro may noticeably weaken against the US dollar. In any case, in the EUR/USD pair, you need to monitor the 2021 low near 1.1664, the breakdown of which will open the way to 1.1500. Further down is the important area of 1.1290, corresponding to a 61.8 percent correction of the entire rally from the lows of the beginning of last year to the high of the first week of this year around 1.2350," Saxo Bank analysts said.
The increased risk appetite provoked a pullback of the US currency from a one-month low, activating the rebound of the EUR/USD pair, which managed to reverse the fall to the lowest level since August 20 and rise again above 1.1700.
However, disappointing data on business activity in the eurozone for September prevents further growth. Although the indicators remained in the area of growth, they decreased compared to August, not meeting market expectations.
According to Markit Economics, the composite purchasing managers' index of the currency bloc, according to preliminary estimates, sank to 56.1 points in September from 59 points recorded a month earlier, and against the projected 58.5 points.
Another "anchor" for the EUR/USD pair is the parliamentary elections in Germany, which will be held this Sunday.
The outgoing chancellor of the country, Angela Merkel, at the last moment tried to support her successor, Armin Laschet, in the center-right CDU/CSU bloc. However, recent opinion polls have shown that voters are more sympathetic to the center-left candidate Olaf Scholz. Investors prefer a coalition led by Lachet, but a "traffic light" agreement, which will include a business-friendly FDP, would also be satisfactory.
As for the technical picture, the growth of the EUR/USD pair still faces strong resistance in the area of 1.1750-1.1755. A breakdown of this area can cause a short squeeze and throw the pair to 1.1800, and then to 1.1850.
On the other hand, the nearest support is at 1.1700, and further – at 1.1680 and 1.1664. A breakthrough below will target sellers at 1.1600.
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