Dollar goes below in red after FOMC meeting (Daily analysis 29.07.2021)

The long-awaited Federal Reserve meeting results in a weaker dollar, especially against the background of the recent slowdown in trading. The EUR/USD pair rises above 1.1850.

For now, the move is a rebound of the US currency's recent strength, but at any moment, space could be opened for it to weaken by around 1%.

Fed makes next steps towards normalisation

The Federal Reserve has continued its shift in focus ahead of the start of the tapering off of asset purchases - there are still signs that such a decision is expected to be announced later this year. Among other things, the message included noting that the economic situation in the areas hardest hit by the pandemic is improving but that recovery is still underway. This wording reflects progress, as the previously mentioned sectors were described as in a state of weakness.

Moreover, the traditional mantra about heading towards the Fed's (double) target, i.e. meeting the inflation target at full employment, was repeated. There was also the assessment that the inflation shot is mainly due to supply-side factors and is transitory in nature. The monetary authorities will assess the incoming data and analyse the economy's progress at the next meetings. The key meeting is likely to be in September when two labour market reports will be released and new macroeconomic projections will be presented. It may be too early for the Fed to make another move towards more hawkish rhetoric at the central bankers' symposium in Jackson Hole, which traditionally takes place in late August.

Too early to bet on rate hikes and the dollar

If the text of the statement confirms that the moment for cutting off the monetary stimulus is approaching, why is the dollar losing value? The answer can be found in the press conference of the Fed Chair. Jerome Powell again sounded a little softer than the content of the document. What prevailed above all was the wording that interest rate hikes are a very distant prospect. Powell also suggested that the Federal Reserve would not act hastily. The dollar has maintained strength recently (e.g. the EUR/USD was stuck around 1.18 level), suggesting that part of the market was hoping for a more decisive change of policy.

The timing of the first rate move will be crucial for the US currency. If inflationary pressures remain strong, it could even be possible in the Q4 of next year. However, the path of rates remains a big unknown and Powell's caution will not be conducive to betting on such a scenario in the coming months. Therefore, our currency forecasts for the rest of 2022 assume a moderate weakening of the dollar against major currencies, e.g. we expect the EUR/USD to return to 1.20.