FOREX Fundamental analysis for EURUSD on May 4, 2023
The Fed has expectedly increased the rate by 25 basis points and the markets believe that the regulator will pause in tightening of the monetary policy. However, Jerome Powell at the press conference following the Central Bank meeting tried to persuade those present that the opposite is true, saying that "the decision to end the monetary restriction cycle has not been made yet, and the Fed can return to raising the rate at any time, if the situation demands it.
We must say that markets did not believe the head of the Fed. The yield of 10-year U.S. bonds fell, the dollar index went down to 100.80 through currency correlation, and EUR/USD almost reached the annual maximum. The rate rose to 5.25 percent, the highest since 2007. The accompanying statement that additional monetary tightening is warranted was replaced by a suggestion that a careful analysis is needed before a decision on restriction is made.
The Federal Funds rate dynamic
The market was left with the view that the Fed was nearing a "dovish" reversal, and Jerome Powell failed to dissuade investors from doing so, although he did hint at possible surprises with the slow pace of inflation.
The evolution of Fed rate expectations in September
Confidence that the Fed will pause to tighten monetary policy virtually rules out the option of a 50 basis point ECB rate hike. The only thing Christine Lagarde's team might surprise with is a faster-than-expected balance sheet reduction. But that option is highly questionable as well.
At the same time, I believe that the Fed should not be written off completely. A strong labor market report and some good economic statistics could bring investors back to buying the dollar.
I do not rule out that ECB meeting will be a signal for long positions fixing in EUR/USD. We hold longs for now, but we are ready to roll over at any moment.