17.06.202112:10 Forex Analysis & Reviews: US dollar sharply rose after the results of the Fed meeting

The US currency waited for its finest hour, sharply rising after the Fed meeting. However, its ability to stay afloat for a long time remains in question.

On the evening of June 16, the Federal Open Market Committee (FOMC) ended its regular meeting. This resulted in the noticeable growth of the US dollar, recovering the previous losses. On Thursday morning, the EUR/USD pair rapidly declined to the level of 1.2002 from the previous level of 1.2100 and higher.

The attitude of the market to the results of the regulator's meeting is vague: the prospects for tightening monetary policy even in the distant future do not suit market participants. At the same time, the updated forecast of the FOMC representatives assumes two rate hikes by the end of 2023. With regards to other points, the Fed's decisions largely coincided with analysts' forecasts. The Fed is expected to keep the interest rate at 0-0. 25% per annum, and also left interest rates low until the maximum employment and inflation indicators of 2% are reached. Moreover, the regulator will continue the program of asset repurchase in the amount of $120 billion per month.

In terms of inflation and unemployment, the Fed is moderately positive. The regulator has improved the inflation forecast this year to 3.4% (from the previous 2.4%), and to 2.1% (from the previous 2%) next year. As for the unemployment forecast, it is maintained at 4.5% for 2021, and improved to 3.8% (from the previous 3.9%) for the following year. The Federal Reserve also showed a positive attitude towards US GDP growth for the current year. This indicator is improved to 7% from the March indicator of 6.5%.

Summing up the meeting, the regulator stressed that it intends to use all the financial instruments necessary to help the economy. The Fed's immediate goal is to make significant progress on key indicators. According to Fed Chairman Jerome Powell, the key indicators, which include the level of employment and business activity, continue to improve. In the short-term planning range, the regulator expects progress on a number of points, primarily on unemployment and inflation level.

The current situation turned to be in favor of the US dollar, which took the chance to noticeably increased. Experts believe that the national currency has peaked in the last 15 months. In turn, the Euro currency is lagging behind it, trying to catch up. According to analysts, the downward rally of the pair slowed down near the level of 1.1985 after the Fed meeting, and then the correction began. They also note the "bearish" sentiment in the EUR/USD pair, although they admit that everything can change at any time.

The long-term economic strategy of the US monetary authorities aimed at financial stimulation after the crisis caused by the pandemic may turn out to be the problem. Natixis' currency strategists estimate that after COVID-19, the cyclical recovery of the US is proceeding faster than in the eurozone. This fact suggests that the United States will return to full employment faster than European countries. The implementation of such a scenario will lead to the curtailment of the current monetary policy, and in this respect, the US will surpass Europe.

According to Natixis analysts, the issues of monetary policy on both sides will become especially acute next year. They believe that there will be a gap between the monetary policy of the two countries in 2022 if the quantitative easing (QE) program is reduced in the US and the Eurozone. In this situation, the US dollar is likely to make a long-term decline since the monetary policy of the eurozone will become more expansionary.