FOREX Fundamental analysis on March 21, 2024
Financial markets patiently awaited the updated FOMC rate forecast, but in fact Jerome Powell threw a greed party without warning. The first-ever surge of the S&P 500 above 5200 and gold above $2200, and EUR/USD above 1.09 were caused by statements by the head of the Fed that the latest inflation data did not change the overall picture, and that the start of monetary expansion is close. Yes, the path will not be easy, but it is not easy for anyone right now.
Investors saw what they wanted to see – the FOMC's December forecasts of three acts of monetary policy easing in 2024 remain in force. Only 2 out of 19 officials do not expect a reduction in the federal funds rate, another one foresees a decrease of only 25 basis points. Most are ready to reduce the cost of borrowing to 4.75%.
Unsurprisingly, the probability of monetary expansion starting in June soared from 55% to 75%, the yield of treasuries collapsed, and stock indexes broke historical records again, which, through the correlation of currencies and indices, became a real storm for the US dollar.
The Fed is signaling that it no longer needs a recession to achieve its inflation target. The central bank has raised its GDP growth forecast for 2024 from 1.4% to 2.1%. So, the rise of the S&P 500 looks quite logical.
However, it was not without a fly in the ointment. Now, only one FOMC official needs to change his mind so that the forecast for 2024 shifts from three to two acts of monetary expansion. In December, two representatives of the Federal Reserve had to do this. The long-term neutral rate was raised from 2.5% to 2.6%. The inflation forecast for the end of this year has also been raised from 2.4% to 2.6%. The Fed sees a higher PCE, but is not going to abandon the idea of easing monetary policy. Great news for EURUSD!
Financial markets' fears that the Central Bank will delay holding rates to a plateau have not been justified. Nevertheless, the fate of the main currency pair still depends on inflation. If the PCE continues to accelerate in March, the US dollar will regain its footing.
The policy of Central banks remains dependent on a large array of different data, which was once again confirmed by Christine Lagarde. The ECB cannot promise a rate cut at every meeting after June. The EURUSD bears were counting on a faster easing of monetary policy in Europe compared to the United States. However, Frankfurt does not want to overtake Washington in the mitigation race.
The rise of the EUR/USD may continue until the release of important statistics on employment and inflation in the United States, so the longs formed from the levels of 1.088 and 1.0905 remain in force. Nevertheless, the potential for strengthening the main currency risk with a strong US economy and coordinated monetary policy of the world's leading Central Banks seems limited.
EUR/USD technical analysis
EUR/USD is strengthening after the US Federal Reserve left the interest rate unchanged, and Jerome Powell outlined a forecast for an interest rate cut of 0.75% in 2024. The immediate target for euro buyers is the target area of 1.0972 - 1.0946. If the range passes, then the next target area becomes the "golden zone" within 1.1039 - 1.1030.
In the short term, the trend remains upward. The key support area is 1.0855 - 1.0842. On Thursday, we plan to keep purchases focused on the target area.