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01.11.202311:52 Forex Analysis & Reviews: Fed's status quo to cause minor changes in markets. EUR/USD and AUD/USD might grow within sideways channels

The highlight of the day is certainly the Federal Reserve's decision on monetary policy. The meeting began on Tuesday. The US central bank is widely expected to maintain all monetary policy settings without changes.

Market consensus, as reflected in Fed Funds futures, indicates a 98% chance that interest rates will remain at current levels. Still, there is doubt that the official funds rate will be put on hold at its current level. The main catalyst for raising the interest rate is considered to be high inflation, which, according to the latest data, is at around 3.7%, way above the Fed's target of 2%.

Actually, this is where all the reasons for increasing the funds rate end. If you look back to the dynamics of inflation in the US, for example, since 2000, on average it was at levels just above 3% and only since 2010 has it been at around 2% or even slightly below it.

After the mortgage crisis of 2008-09 and the pumping of the economy with fiat dollars from 2010 to 2016, the key interest rate was at just above 0%, which was ensured by the Fed's ultra-loose monetary policy. But if you pay attention to the dynamics of the level of interest rates, for example, from the 80s of the last century to the end of 2009, then the range of the interest rate level was from 2% to 20%, and the range of inflation was from negative values to 15%. Therefore, the Federal Reserve's intention to reduce inflation to 2% by any means is simply unrealistic, mainly due to significant changes in the structure of the American economy and its current state.

What happened since the beginning of the century, as well as after the mortgage crisis and the coronavirus pandemic, belongs to the past. The US has a different economy, which is very dependent on imports and external demand for the dollar. The simmering standoff between Russia, China, Iran, and the countries that have actually joined them, the so-called global south, with the US and its allies is already denting interest in American debt assets and, as a result, in the US dollar. If previously the US easily "exported" its inflation abroad through selling Treasuries, this process has suffered greatly in recent years and has been critically worsened due to the crisis in Ukraine and, of course, a huge public debt measured in trillions of dollars.

In fact, taking into account all the pros and cons, we can say that the Federal Reserve will have to come to terms with higher inflation and, of course, interest rates over time. Most likely, inflation will remain in the range from 3% to 4%, as well as the key interest rate above 5% in the near future.

As for the outcome of the American regulator's policy meeting, we believe that, most likely, rates will remain unchanged, and Jerome Powell at the press conference will traditionally scare off market participants with another rate hikes. He has commonly behaved this way in recent months.

On this wave, stock markets in the US, Europe, and the Asia-Pacific region may receive support today and tomorrow. Against this background, the dollar may come under pressure against major currencies, but one should not expect any strong global decline. This is primarily due to the fact that the major central banks, whose main currencies are traded on Forex against the dollar, will also hit a pause button in changing interest rates. In turn, popular trading instruments are set to trade in a range-bound manner.

If the Federal Reserve unexpectedly decides to raise interest rates, then we should expect the opposite picture, positive for the dollar, but negative for stocks and bond markets.

Intraday outlook

Exchange Rates 01.11.2023 analysis

Exchange Rates 01.11.2023 analysis

EUR/USD

EUR/USD is trading not far away from support, following a short-term uptrend in anticipation of the Fed's policy announcements. If everything goes smoothly and the US central bank doesn't spring surprises, the instrument could climb above 1.0600. Then, EUR/USD is expected to grow locally to 1.0680.

AUD/USD

The currency pair is trading in the range of 0.6300 to 0.6400. Apparently, the instrument is likely to continue trading sideways. If the Federal Reserve keeps interest rates unchanged, the instrument might give in to the overall positive sentiment and cling to 0.6400, the upper border of the trading range.

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