Fed announces no changes in monetary policy; the U.S. Dollar weakens - Market Overview

Fed announces no changes in monetary policy; the U.S. Dollar weakens - Market Overview

Fed’s meeting from yesterday ended without changes in monetary policy, as expected.

The U.S Central Bank decided to keep interest rates at near-zero levels and did not announce when it planned to let up on its $120 billion in monthly bond purchases.

To explain their decision, Federal Reserve officials stated that it was necessary to see substantial progress towards the major goal of full employment and that risks related to the evolution of the pandemic were still high.

Tomorrow’s Employment report becomes crucial in the context.

Tomorrow’s NFP report could play an essential role in this regard. Any improvement above expectations could have a high impact on the market, especially for treasury bonds whose yields have fallen in recent months and for U.S. Dollar, which fell after yesterday’s Fed meeting.

Regarding the latest increases in the prices, Mr Powell continues to view the current rise in inflation as transitory and not structural.

Fed’s next MPC Meeting will be on September 22, when the markets expect them to update their macro scenario of growth, employment, and inflation. Before that, the Central Bank has the Jackson Hole meeting scheduled at the end of August, when it could provide more details on the withdrawal of monetary stimuli.

How did the markets react to Fed’s decisions?

The markets' reaction was somehow limited: equities were unhinged, the bond yields stabilized, while the U.S. Dollar weakened against its major counterparts.

For example, the EUR/USD pair reversed its previous downward movement, which failed to pierce the 1.1750 and 1.1710 supports and approached the resistance zone located at 1.1890. Such a movement can be considered corrective for now, and it finds at 1.1975 above which the current bearish momentum would be over.

The euro continues to be under pressure mainly from the ECB’s ultra-expansionary monetary policy.

At the macro level, today's attention will be on the U.S’ Second Quarter GDP, for which strong growth is expected: 8,5% quarterly annualized vs 6,4% previously. This figure is not expected to significantly impact the market as Fed's focus is not on economic growth but job creation. Still, high growth can have an impact on the labor market.

The weakness of the dollar has also been seen in the USD/CAD pair. This pair had broken to the upside, but it returned to the previous levels below the neckline located at 1.2627. As oil has regained territory in recent days also influenced the USD/CAD pair due to its positive correlation with the Canadian currency.

Sources: Bloomberg, reuters.com.

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