Mild Fed pushes down the dollar exchange rate (Daily analysis 18.03.2021)

Yesterday's Federal Reserve meeting was the main event of the week. Briefly, the outcome was unfavourable for the USD. The American currency ended Wednesday at a low level against all the main currencies, e.g. it depreciated by over 0.5 percent against the euro and the pound.

The EUR/USD jumped up towards 1.20, and, as a result, it is getting closer and closer to achieving a reliable maximum in the dollar's quotations. This fits our assessment that its recent dominance has a temporary nature and is only a correction in the downturn that began in 2020.

Federal Reserve sticks to its plan

The Federal Reserve maintained the cost of money in the range of 0-0.25% and will continue to purchase assets at the pace of a minimum of 120 billion USD per month. Projections for this year's growth have been raised very boldly (from 4.2 to 6.5 percent), and the unemployment rate has been lowered, which is expected to fall below 4 percent by the end of next year. The projections indicate that the preferred measure of inflation will not get out of control, and interest rates will remain unchanged at least until the end of next year.

This combination should be assessed as a very mild message. The Fed wants to communicate in this way that it knows that the economy will accelerate, but this will translate into cutting off the stimulus, i.e. starting to terminate the asset purchase program. In order for a rate hike to be considered at all, the labour market must be close to full employment. Two statements made by Jerome Powell at the press conference should also be quoted. Firstly, he stated that the policy stance change would not be conditioned on optimistic forecasts but tangible and evident progress. Secondly, he assured that the Fed would ensure soft financial conditions to accelerate the recovery from the pandemic lows maximally.

Bank of England has no grounds to act

The pound has been one of the strongest of the main currencies this year and should maintain that status for now. Similarly, supported by the rebound in oil prices, the Norwegian krone and the Canadian dollar rose against the zloty by about 5 percent. The British currency became a favourite of investors thanks to the vaccination programme's rapid progress (especially compared to the European Union). It was also beneficial to shed the ballast in the form of indefinitely prolonged Brexit uncertainty. Monetary policy also played its part. At the beginning of the year, the Bank of England kept its distance from the idea of introducing negative interest rates. The combination of the epidemic and economic situation does not give the slightest reason to change the position at today's meeting (decision at 1:00 p.m. CET). Earlier, the Norwegian Central Bank meeting will be held, and on the macro data front, we should expect the publication of the regional economic sentiment index for the Philadelphia area and the weekly portion of the information on the number of newly registered unemployed (1:30 p.m.).