It would seem that what is the difference between the phrases “act according to circumstances” and “monitor the situation in order to determine the trajectory of the bet”? It turns out that significant. In the first case, the Federal Reserve needs only one disappointing report on the American labor market to weaken monetary policy, and in the second, the regulator will need a significant deterioration in macroeconomic indicators, which is difficult to determine by the only release on American employment. Apparently, Fed Chairman Jerome Powell was able to find the right words to calm markets. As a result, the S&P 500 updated historic highs, while Treasury yields and the US dollar fell.
On Wednesday, the Fed lowered the interest rate by 25 basis points from 2% to 1.75% for the third time in a year.
At the final press conference, the head of the American Central Bank, J. Powell, noted that the current rate is appropriate as long as the US economy is growing at a moderate pace and the country’s labor market remains strong. At the same time, the Chairman of the Federal Reserve did not rule out neither monetary easing nor its tightening. Moreover, according to J. Powell, a significant and steady increase in inflation is needed to raise interest rates.
Thus, market participants took the comments of the head of the Fed with optimism since managed to convince investors that the S&P 500 could move north not only against expectations of a cut in federal funds rates, but also in the conditions of a pause announced by the Fed. That is, the US economy is still strong, and demand for stocks remains high. In addition, the market believed that the Central Bank managed to save the United States from recession thanks to the preventive easing of monetary policy. Although US GDP growth in the third quarter slowed from 2% to 1.9%, consumer spending expanded 2.5% year by year.
However, according to estimates by Bloomberg Economics, GDP of the Eurozone increased by only 0.1% in quarterly terms in the third quarter.
Given the existing difference in the US and EU economic growth, the pair EUR / USD should decline, but on the contrary, it is growing. This factor, apparently, has already been put in quotes, that is, it has been won back. Now, reducing divergence leads to the closure of short positions on the euro and its strengthening. It is expected that due to the progress in the Washington-Beijing trade negotiations, as well as the weakening of the risks of disordered Brexit, the gap in the growth rate of US and European GDP will narrow. However, this will take some time. In addition, many problems of the currency block are still far from being resolved. Therefore, the growth potential of EUR / USD seems to be limited by the levels of 1.127-1.135. Therefore, it is possible that the main currency pair reached the bottom near 1.093-1.096 in early October. At the same time, the chances of seeing EUR / USD consolidating in the range of 1.104-1.135 by the end of the year are still quite high.