Forex Analysis & Reviews: 02.02.2023 - The euro got a boost after...

02.02.2023 08:37 AM

The euro got a boost after the Fed meeting: the flight continues

The European currency, unlike the American one, demonstrated stunning growth again, breaking through a psychologically important level of 1.000. The greenback has to work hard to "save face" and maintain its status as the world's leading currency.

After the results of the Federal Reserve meeting, the greenback slowed down a bit, but rising further is out of the question. On Wednesday evening, February 1, the dollar persistently fell, while the euro climbed to 1.0907. According to analysts' observations, for the first time in the last 10 months, the single currency peaked at 1.1000 and then successfully overcame this barrier. On the morning of Thursday, February 2, the EUR/USD was near 1.1016, surprising the markets with the weak dollar and the euro climbing to new highs.

At the end of the meeting, as expected, the Fed raised the federal funds rate by 25 basis points to a target range of 4.5%-4.75%—the highest level since early 2008. Earlier, the central bank slowed the pace of rate hikes: at its meeting in December 2022, the rate was increased by 0.5 percentage points, and before that it had been increased four more times by 75 basis points. The next Fed meeting is scheduled for March 21-22.

According to the central bank's statements, it needs to deliver a 'couple' of more rate hikes to get to that level they think is appropriately restrictive, which will help to achieve their goals.

According to Fed Chairman Jerome Powell, in the near future, the central bank has "more work to do" related to the normalization of inflation. To do this, the Fed will need to continue to raise rates to curb inflation. Earlier, he said "policymakers did not see this as a time to pause." "I still think there is a path to getting inflation down to 2%," the Fed's target level, "without a significant economic decline or significant increase in unemployment," he said. At the same time, Powell stressed that the U.S. economy will continue to grow despite deflationary measures, and inflation will return to 2% without a significant spike in unemployment and a massive economic slowdown.

Commenting on the outlook for monetary policy after another rate hike, the FOMC chairman said that excessive tightening of monetary policy is caused by the current need, but is not a priority. "In light of the cumulative tightening of monetary policy and the lags with which monetary policy affects economic activity and inflation, the Committee decided to raise interest rates by 25 basis points, continuing the step down from last year's rapid pace of increases," Powell added. Asked about a possible easing of monetary policy, the FOMC chairman noted that "the historical record cautions strongly against prematurely loosening policy."

Earlier Powell said that it was premature to talk about defeating inflation, although it has now eased noticeably. Nevertheless, the inflation rate in the U.S. remains high, so victory is still far away. This requires a decrease in all inflationary components, the Fed chair stressed.

Regarding rate hikes, the Fed's position remains the same: at least two interest rate hikes are needed on the appropriate restrictive level. However, the central bank is now far from such a level, but it should strive for it.

Against this background, market participants expect that the growth of rates will slow down in March and remain at the level of 4.75%-5%. According to preliminary forecasts, in September 2023, the central bank will lower the rate amid slowing inflation and the onset of recession in the U.S. economy. However, the situation could change, as in December 2022, the Bank claimed that it did not intend to cut rates until 2024.

The market perceived Powell's latest comments as dovish, despite the warning about the difficulties on the way to achieving the inflation target. In addition, analysts recorded a significant gap between current market prices and the Fed's plans. Against this background, "strong economic shocks" are possible in the near term, specialists at Mizuho Bank noted.

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Larisa Kolesnikova,
Analytical expert of InstaForex
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