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Yesterday's events entirely showed investors' serious attitude towards the results of the Fed's monetary policy meeting, which will be announced today.
The volatility in global markets noticeably rose during the US trading session on Tuesday amid various opinions about the beginning of the reduction in the volume of the Fed's government bond repurchases and the cycle of interest rate hikes. These are certainly the reasons to be concerned. Today, the US regulator will present its updated forecasts for GDP, employment, inflation and the like. In addition, J. Powell's traditional press conference will be held, from which investors will expect information about the prospects for Central Bank's possible monetary policy changes.
In view of this, the market believes that the regulator will stop the monthly repurchase of government bonds in the amount of $ 80 billion and mortgage securities in the amount of $ 40 billion by the end of this year. So next year, the process of normalizing monetary policy may begin, accompanied by an increase in interest rates.
The government debt market understands all these risks, and thus, a sell-off of Treasuries is observed, which causes growth in the yields.
The market situation yesterday really indicates that the volatility growth was intentional. Apparently, some investors are panicking, which is clearly reflected in the fluctuating movements of stock indices, as well as the sharp rise and fall in currency pairs where the US dollar is present in the financial market.
Assessing the current situation, we believe that the tension will further continue until the Fed's results and Powell's speech, which will definitely lead to some movement in all markets. It can be recalled that the Fed Chairman said that the regulator will not change the monetary exchange rate for several more years despite the rise in inflation and the expected overheating of the economy in the wake of the recovery process. So, if he reassures investors in his speech, then this will stimulate the growth of demand for company shares and will put pressure on the US dollar. However, if he hesitates and unclearly voices out its comments on the future prospects for monetary policy, the markets will perceive this as a possible signal of an earlier start of the normalization process of monetary policy.
In this case, it will be possible that the stock indices will fall amid the same active growth in the yield of treasuries, which will also be accompanied by the dollar's strengthening position.
Forecast of the day:
The EUR/USD pair is under pressure ahead of the Fed's meeting results. We believe that negative news for the USD may force it to further decline to 1.1865, and then to 1.1820. It should also be noted that much will rely on Powell's words.
The USD/CAD pair is trading around the level of 1.2455 in anticipation of the result of the Fed's monetary policy meeting and the publication of consumer inflation data in Canada today. We believe that if the indicated results puts pressure on the US dollar, and Canadian inflation shows an upward trend, the pair will further fall to the level of 1.2400.
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