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Why did euro fall on the Fed publication?


29 January 2021

Biden's new stimulus plan faces resistance from a bipartisan group. Republicans believe the overall cost of Biden's stimulus package could be reduced during negotiations on Capitol Hill, and some measures would be reversed. Republicans rejected Yellen's argument that low interest rates suggest there are no problems with household spending.

In such a situation, the Democrats can compromise, and the final size of the package may be only $900 billion, and not $1.9 trillion, as is now expected. Most likely, the incentives will be adopted after the completion of the second impeachment procedure of Donald Trump. The previous hearings lasted about three weeks, and the new ones will begin on February 8.

An additional factor to this is that Joe Biden extended the moratorium on forced evictions of Americans until March 31. Given the above, the new stimulus package is likely to be approved in late March or early April, its volume will be much closer to $1 trillion than $2 trillion, and its target group will be the most affected consumers and small businesses.

About two hours before the beginning of the US trading session on Wednesday, the ECB representative Klaas Knot spoke. In his public statement, the European regulator's representative said about possible easing of monetary policy by further reducing the interest rate.

The euro has fallen sharply on this news and updated the lowest value in a week and a half. The market already estimates a 70% probability of a 10 basis point reduction in the deposit rate. At the moment, the regulator simply does not have more effective ways to contain the growth of the euro.

Verbal interventions may delay, but not stop the strengthening of EUR / USD this year, as the dollar will remain weak throughout 2021. During the already developing fall in the EUR/USD, the US regulator began its speech. And just like the ECB, he bombarded the market with promises of further comprehensive stimulus.

The Fed left the rate at 0-0.25% and confirmed its intention to continue buying assets in the amount of $120 billion per month, $80 billion of which is government bonds (UST). These are the standard amounts of incentives that have been in effect for more than a month.

The buying will continue until the inflation rate in America goes above 2% and stays there for a while. In the past few months, any similar statements from the two largest liquidity providers and the authors of the current bullish trend have encouraged the market. However, this week everything went wrong, which may indicate the beginning of the ongoing changes and a possible change in the trend in the EUR/USD currency pair.

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