FX.co ★ EUR/USD: Is the Fed's value for the US dollar exaggerated?

Many economists come to the conclusion that the Fed's influence on the future dynamics of the US dollar is not decisive. The importance of the regulator is not in doubt, but experts believe that the excessive importance is attached to its impact on the national currency.

The sharp price movement of the US currency, along with other financial instruments, primarily gold and treasuries, reflects the potential changes that are allowed at the end of the Fed meeting on Wednesday, June 16. It should be recalled that it is considered the main event of the current week, as the representatives of the regulator mentioned a number of important issues related to further monetary policy for the past two days. Following the meeting, the Fed will publish a final decision on the key rate and provide forecasts for key economic indicators.

Experts do not exclude that there will be news on the tightening of the PREP at the current meeting. According to them, the regulator's plans may change, but the key parameters of the existing monetary policy will remain the same. It is possible to discuss reducing the pace of the quantitative easing program (QE), for which the market is psychologically ready.

However, experts warn that one should not expect super-tasks from the Fed. This is not necessary, since the Federal Reserve considers the current economic situation favorable and conducive to the implementation of its plans. Analysts believe that the increase in demand for long-term Treasuries, recorded since the beginning of this month, indicates the strength of the Fed's persuasion. The regulator assured market participants that high inflation in April-May 2021 is a temporary phenomenon, and if QE is curtailed now, there will be doubts about stability. The current condition indicates that inflation is under the control of the Fed.

The US regulator remains confident in the temporary nature of the inflationary surge and is ready to stick to the ultra-soft PREP. However, the markets are concerned about some instability of the situation, fearing a possible acceleration of inflation. The uncertainty about the US dollar is worrisome.

At the same time, any hints from Fed Chairman Jerome Powell about the possibility of changing the current monetary policy towards its tightening will lead to a reduction in the dollar's short positions and to its rise. Last night, the US dollar slightly declined, losing to the Euro currency. On the morning of Tuesday, the EUR/USD pair was in relative equilibrium near the level of 1.2126.

Experts consider the US dollar to be one of the main funding currencies, which negatively correlates with the demand for risk. Currently, the market may strengthen risk sentiment, which will become a hindrance for the dollar again. According to analysts, the strong dollar is only supported by individual expectations from the Fed. economists warn that a downward trend is possible after the meeting.

Many experts believe that the Fed's actions are not key to the further dynamics of the US dollar. The ups and downs of the US currency depend on many factors, and the influence of the Fed is not the most important thing, although it is considered one of the main ones. The direction that the dollar chooses, while remaining in an upward or downward trend, consists of many components, among which are the global economic situation, geopolitical and financial factors, as well as the dynamics of equivalent exchange-traded instruments, primarily the euro. Nonetheless, the impact of the regulator on the dynamics of the USD remains one of the important for the market.