FX.co ★ Market activity falls before the Fed's monetary policy meeting

Fed's two-day monetary policy meeting will start today, which could slightly revive the markets.

Market participants are not looking forward to the result of the meeting on the parameters of monetary policy, since they are supposed to be completely preserved – the levels of interest rates, as well as the volume of asset repurchases, but to the Central Bank's discussion of the future change in the monetary policy rate, which will most likely begin to change by the end of this year.

What can serve as a basis for changing the course of monetary policy?

There is no doubt that not only the likely continuation of inflation growth, even if it is small from the current values, but even stabilization at the current level of 5.4%, which is the highest level in the last 13 years, will be the basis for the start of changes. Investors will closely follow the rhetoric of the Fed Chairman J. Powell, and the published resolution of the Central Bank, which does not only hints at the change of course but also specific dates.

How will the markets react to the Fed's decision and Powell's speech?

Everything will depend on the content of the final resolution and the tone of the speech of the head of the US regulator will be. If amid maintaining the parameters of monetary policy, nothing significantly new appears in Powell's resolution and conclusions at the press conference, then this will lead to an increase in demand for company shares, a decline in the yield of US government bonds and a weakening of the US dollar.

However, another scenario is also possible. Any specific hints or words about the timing of the beginning of the reduction in the volume of repurchase of Treasuries will lead to a drop in demand for shares, an increase in the yield of Treasuries, and a strengthening of the US dollar.

The market picture clearly shows the lack of certainty about the outcome of the meeting, which is manifested in the decline in activity in the currency market, as well as in the cautious actions of investors.

Assessing everything that is happening in the markets, as well as the obvious reluctance of the Fed and Powell personally to shake it up in the conditions of a weak labor market and high inflation, we believe that the first scenario will most likely be implemented.

Forecast of the day:

The EUR/USD pair remains in the range of 1.1755-1.1815 waiting for the results of the Fed's monetary policy meeting. We expect the pair to remain in this range until tomorrow, but if it breaks through it, then it will most likely rush first to a level of 1.1850, and then to 1.1880.

A similar picture is observed in the XAU/USD pair. Gold moves in the range of 1791.65-1808.65, wherein it will probably remain today. A breakout above the level of 1808.65 could be the basis for the pair's further growth towards 1833.00.