Dollar under pressure from Federal Reserve policy (Daily analysis 29.04.2021)

The US dollar remains weak after the Federal Reserve meeting, which does not even think about tightening the rate due to the fantastic information from the economy.

Neither the Federal Reserve meeting nor the new tax plans of President Joe Biden's administration came as a surprise, which translates into deepening trouble for the US currency. The EUR/USD pair has finally managed to breach the 1.21 barrier.

FOMC sticks to the script

Despite the accelerating, even rapid, recovery from the pandemic hole, the monetary authorities declare patience before abandoning the crisis-oriented, ultra-soft policy, consisting of the monthly purchase of assets at the pace of at least 120 billion dollars and zero interest rates. The Fed, in other words, is not showing any signs that it may be afraid of overheating the economy and that this fear may influence its upcoming decisions, bringing the discussion about limiting quantitative easing closer.

The economy, supported by fiscal stimulus, is beginning to thaw very strongly. Already in Q1, the GDP growth rate probably reached 7% (in annualised terms). Today's national accounts readings should confirm this. The labour market is rapidly recovering the jobs lost in 2020, with around two million new jobs likely to be created in April and May. Inflation is also accelerating and is set for further gains. However, the Fed was well aware of all this. The March projections were (especially for a central bank) bold and optimistic. There are no obvious signs that price pressures, contrary to the Federal Reserve's strategy, are not yet temporary and will get out of control. It can still be blamed on statistical effects, pandemic-related bottlenecks, and food and commodity prices. The current Fed stance is negative for the dollar, and currencies with strong links to the business cycle should benefit from the recovery spreading through the global economy: namely the entire emerging markets basket, and in the G-10 space: the euro and Scandinavian currencies, among others.