Federal Reserve Chairman Jerome Powell made it clear that it will take a long time to achieve the central bank's inflation target – about three years. This time frame was announced for the first time. For the financial market, this means that the printing press of the US central bank will work for a long time, and the rate will remain near zero. If earlier bank analysts allowed for a tightening of monetary policy more and more often in their forecasts, now this question has disappeared. Powell will put all the dots on the "i". The dollar received a clear negative signal. The dollar index went below 90 points on Thursday.
There is an uncertainty factor in the form of the report on the US GDP indicator. The market has recently reacted poorly to such figures, but, nevertheless, this is an important indicator that can affect the dollar exchange rate.
The US economy grew by 4.1% in the fourth quarter of 2020, according to the second estimate. At the same time, the markets expected an improvement in the estimate of the growth rate to 4.2%. The number of initial applications for unemployment benefits in the United States decreased by 111,000. The consensus forecast suggested a reduction in the indicator by only 23,000. This rate of decline is the fastest since August 2020, and the indicator itself fell to the lowest since the end of November.
No matter how much the dollar is scolded, it is not as hopeless as it may seem now. This year, the US economy is likely to recover faster than in other developed countries. Investors draw conclusions and begin to adjust expectations about interest rates in the United States. This will benefit the dollar.
As for the EUR/USD pair, it maintains the trend for recovery, breaking through the area of the value of 1.2230. In addition to the weakening dollar, the euro continues to be supported by macroeconomic reports. The German economy grew by 0.3% in the fourth quarter of 2020. The catalyst was an increase in investment and exports, which offset a decline in consumer and government spending.
According to the research company GfK, the index of consumer confidence in the German economy rose to -12.9 points in March from the revised level of -15.5 points in February, which is better than the forecast.
Another trigger for the euro may be a long-awaited breakthrough in the issue of new incentives in the United States. The $1.9 trillion package of measures is expected to be adopted on Friday. US President Joe Biden must sign the bill by mid-March. At this time, the main unemployment programs expire.
After the bill is passed, the new printed money will accelerate inflation, and the stock market will grow stronger. Given this factor, traders are selling the US dollar, which seems to be the main victim of such a significant increase in the money supply in the country.
EUR/USD quotes may grow around the 1.23 mark in the short term. Closer to May, if there are no events that can neutralize all the positive for the euro, the main forex pair will get close to the 1.25 mark.
Traders of the pound, probably, have already managed to put all the available positives in the pound's value, and now the British currency simply has nothing to grow on. The rally against the dollar slowed near the 1.42 mark. Analysts suspect that the GBP/USD pair has peaked.
Although the vaccination news remains positive, its impact on the pound may be weak. "The movement in the rate market has already exhausted itself, and it is unlikely that the markets will start discounting further rate increases," RBC wrote.
Speaking about the pound, it is necessary to take into account the situation in the energy market, where the quotes have accelerated and can not stop. Panic sentiment due to the pandemic is gradually fading, traders are hoping for a mass vaccination. This is also noticeable in terms of indicators, namely, the inter-market gold/oil ratio, which continues to decline and has settled below the 27.5 mark. During the height of the panic, it exceeded the 50 mark, and before the pandemic it was around 23.5. Thus, the growth of oil and the decline of gold should continue. The British currency is historically correlated with oil contracts, so a decrease in this ratio may cause the continuation of the upward trend in the pound.