EUR/USD: Fed dropped the dollar, will the ECB bring down the euro?

The US stocks rose sharply and the dollar fell after the Federal Reserve left the door open for further monetary easing and weakened expectations of a quick economic recovery after the coronavirus crisis, but the EUR/USD rally was more restrained in anticipation of the announcement of the ECB’s monetary policy verdict.

Fed Chairman Jerome Powell noted at a press conference following the April FOMC meeting that the Central Bank is still determined to use the full range of its instruments to support the national economy. According to him, the regulator will keep interest rates close to zero until there is confidence that the United States has stood the test and embarked on achieving maximum goals in employment and price stability. At the same time, the chairman of the Federal Reserve for the first time called on the US Congress to increase the fiscal stimulus, thereby making it clear that the Central Bank should not remain the only player in the city.

If J. Powell spoke about the V-shaped trajectory of the US economy in March, then in April, he signaled to the markets that hopes for a quick recovery of national GDP in the second half of 2020 risk becoming an illusion, and the Fed is preparing for a long-term struggle against the pandemic.

US GDP fell 4.8% year on year in the first quarter while consumer spending in the country showed the fastest pace of decline since 1980.

Economists say the second quarter could be even worse: US GDP will plunge by 37%, which will be the worst recession since 1947.

Meanwhile, the initiative goes from the hands of the Federal Reserve to the ECB. Jerome Powell failed to lure the EUR/USD pair out of the range of 1.0800 – 1.0900. Will Christine Lagarde do it?

Eurozone countries cannot yet agree on a fiscal stimulus, which transfers the burden of responsibility to the ECB. If the regulator does not expand the scope of QE following the results of the April meeting, then it may hint at such a step in the future.

There are three scenarios:

1. The ECB will not report anything new.

C. Lagarde and a number of her colleagues can now increase their bond purchase program to € 1 trillion. However, like European politicians, the members of the Governing Council of the ECB are divided into representatives from the north and south. The hawks camp is led by Bundesbank President Jens Weidmann, who is likely to reject the idea of a new infusion of funds into the European economy for the second time in a month.

The lack of action on the part of the ECB will put pressure on the single European currency, and the EUR/USD pair will decline. A similar scenario has a high probability of implementation.

2. There is a deferral until June.

The ECB will publish updated forecasts at the next meeting, which will be held in early June, so it may well wait. In addition, a number of EU countries plan to lift quarantine measures in May, which may also clarify the picture.

It is possible that C. Lagarde will be able to persuade the “hawks” to his side over the next six weeks, but at this time, she may hint at a decision on incentives in June whether this helps convince the markets depends on what exactly is said.

If the chairman of the ECB promises to do everything possible, then this can impress the markets, and the euro will have a chance to grow. If C. Lagarde makes it clear that the willingness to act depends on the incoming data, then the rate of EUR/USD will decline. The probability of such a scenario is average.

3. New measures now.

It is possible that the ECB has conducted a new economic analysis that will convince the Governing Council to act as soon as possible. If the regulator announces an expansion in its bond purchase program, which implies an injection of cash into the market, it will be easier for national eurozone governments to support the economy. In this case, the EUR/USD pair may rise, since such a scenario is not included in the quotes. However, there is a low probability of its implementation.

The material has been provided by InstaForex Company –

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Author: MOKAR

Mula berdagang dalam pasaran forex sejak tahun 2003. Manakala pasaran bursa saham tempatan dan global pada tahun 2018. Menjadikan trading online sebagai kerjaya sepenuh masa pada tahun 2019. Kerjaya sebelum ini adalah seorang salesman kereta. Berpengalaman dengan pelbagai teknik dan perguruan tetapi akhirnya sangat serasi dengan teknik FMCBR @ Fibo Musang melalui guruku Cikgu Baha & Cikgu Zul.

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