Today, the main issue of the last few months will be resolved: we will find out whether the US regulator intends to lower the interest rate or are rumors of it premature? The probability of monetary policy easing at the July meeting is now almost at 80%, so the dollar has every chance of a takeoff throughout the market, if the Fed does not confirm the assumptions of traders. Opinions of analysts on this score are divided, so any decision that the regulator makes will cause a stir and increased volatility in dollar pairs.
Donald Trump complicated the already difficult puzzle, who in his Twitter announced a meeting with Chinese leader Xi Jinping at the G-20 summit. The market was once again inspired by the possible end of the trade conflict, and at the same time wondered: will this decision affect the position of the US regulator's members? After all, Jerome Powell, justifying the possible reduction in interest rates, primarily pointed to the escalation of trade tensions. All other fundamental factors in this aspect play a secondary supporting role. Many Fed officials have also repeatedly stated that the key problems of the US economy are related to the trade confrontation between Washington and Beijing. Therefore, now that there is a real chance of resuming negotiations and, accordingly, concluding a deal, the need to lower the interest rate as a preventive measure has largely decreased.
However, this is just one side of the coin.
I will note that today's meeting will be accompanied by the Fed's updated forecasts on the further dynamics of interest rates and macroeconomic indicators. At the end of May, the Federal Reserve actually launched a flywheel of relevant expectations, and now has to reap the rewards of its actions. The 80 percent probability of an interest rate reduction is a time bomb that, in case it is treated "wrong", will detonate and cause a chain reaction that covers not only the currency market. In other words, if today, the regulator does not revise its point forecast, then this fact will bring down the US stock market, significantly increase the yield of Treasuries and sharply strengthen the US currency, which has already risen in price recently against a basket of major currencies, especially the pound and the euro. Mario Draghi, who yesterday actually announced further interest rate cuts and even the resumption of QE, added fuel to the fire. With his rhetoric, he lowered the EUR/USD rate almost to the middle of the 11th figure, becoming the object of criticism from the US president.
It is not difficult to guess the consequences of the "hawkish" Fed meeting: the dollar will again strengthen its position in the entire market, and it will enter the 10th figure against the euro, approaching the key support level of 1.1000 (lower Kumo cloud on the monthly chart). The breakthrough of this target will return EUR/USD within the price range of 1.09-1.05. It is worth noting that the pair has not been at such price troughs since January 2017. For the eurozone economy, such a recession will be beneficial, especially in the context of inflationary growth. But the US economy will once again feel the burden of the more expensive greenback. It is not only inflation that will suffer, but also the sphere of exports, as well as industrial production. In the end, the revaluation of the dollar can adversely affect the dynamics of GDP, especially the inflation component of this indicator.
Thus, Jerome Powell is now facing a difficult choice. On the one hand, the Fed must act in line with general market expectations, especially against the background of the previous rhetoric of Powell himself, as well as of many of his colleagues. On the same side of the scale is the national currency of the United States, which has recently strengthened its position even against the background of rumors about the Fed's dovish intentions. If the regulator refutes these rumors, it will significantly increase the demand for the greenback, not to mention the reaction of the stock and debt markets.
On the other side of the scale is the trade conflict between the United States and China, the escalation of which, in fact, was the reason for the Fed's dovish intentions. Given Trump's "frivolity" and impulsiveness, it is difficult to predict the possible outcome of the G20 negotiations. At the same time, it is worth recalling that the previous similar meeting in November last year ended positively: the parties sat down at the negotiating table and almost six months later they came to a deal. As the participants in the negotiation process assure, the agreement was 95% ready, but the "promotion game" of China (according to the Chinese - the United States) prevented both parties from completing the deal. According to them, if Trump and Xi Jinping can agree on key problematic issues, the deal can be signed by the end of the summer.
In my opinion, Powell will try to show his diplomatic talents today: on the one hand, he will allow the likelihood of a rate cut, on the other hand, he does not specify the date of the possible rate reduction. However, if the point forecast on rates is not revised, the market interprets the outcome of the June meeting in its own way: the dollar will again be in favor, and the EUR/USD bears will be able to return to the 10th figure for the first time in 2017.
