FX.co ★ Fed: on a low start regarding the curtailment of QE

After the long-awaited Fed meeting, the US currency first collapsed sharply and then soared just as rapidly. Such fluctuations excite the market and often confuse investors.

The first sharp drop in the USD price was recorded immediately after the Federal Reserve meeting. At that moment, the dollar collapsed, pulling the euro with it. According to analysts, in its actions, the regulator is approaching the reduction of incentives, which the markets are looking forward to, and plans to raise rates three times by 2023.

According to the updated forecast of the Committee on Open Market Operations (FOMC), known as the dot plot, the first-rate hike will occur in 2022, and the next one – in a year. The dot plot graph demonstrates that the optimal time for the first increase in the key rate is the end of next year.

The current situation has significantly weakened the position of the greenback. It was facilitated by the somewhat chaotic actions of traders, who initially focused on the possible timing of QE curtailment and sold USD. However, having not received clear signals about the moment of completion of incentive programs, market participants rushed to the other extreme, actively buying dollars. As a result, the greenback experienced a shock since such price fluctuations do not pass without a trace. Note that the FOMC members are almost unanimous regarding the curtailment of the asset purchase program: it will start before the end of 2021.

The European currency turned out to be more stable against the American one. Before the publication of the results of the meeting of representatives of the Federal Reserve, the "European" rose in price against the "American," rising to 1.1728. On the morning of Thursday, September 23, the EUR/USD pair was trading at 1.1721, slightly losing its position.

The US central bank met the market's expectations, keeping the parameters of the current monetary policy unchanged. The base interest rate also remained at the level of 0-0.25% per annum. The regulator allowed a slowdown in the pace of asset repurchases in the near future, but subject to "significant progress" in terms of employment and inflation. Experts drew attention to the press conference of Jerome Powell, the head of the regulator, which better clarifies the current situation.

According to the Fed chairman, the reduction of monthly bond purchases by $120 billion may start after the meeting scheduled for November 2-3. The implementation of this plan is possible only in the case of a steady increase in employment in the United States in September, said J. Powell. According to the official, "to narrow the bond purchase program, a report on ultra-high indicators on the labor market is not needed." On this basis, experts conclude that employment indicators in the United States should be moderately high or average. Another important result of the last meeting, analysts believe that the Federal Reserve doubled the limit of counterparties under the reverse repo agreement. It is an important aspect of the monetary strategy since this procedure is a trigger for curtailing incentives.

The further dynamics of the greenback depend on the timing and pace of the upcoming completion of the QE program. According to preliminary calculations, it will end in the middle of 2022. Experts are waiting for the first signals indicating the launch of this long-awaited measure at the Fed meeting, which will be held on November 2-3, 2021.