The dollar is not giving up. There will be no rush to cut rates

The market reaction to Wednesday's decision of the Federal Reserve was quite puzzling. The Fed was not overly dovish at all, but rather maintained its neutral stance. Despite this, the US dollar, bonds, stocks and gold behaved as if the Fed had at least made a cut interest rates. We are currently seeing a turnaround in some cases, although this is primarily seen in the US dollar. Can we then say that the dollar has not given up yet?

The direction of monetary policy is clear

EUR / USD it has already tested almost the level of 1,0950 after the Fed's decision on Wednesday, while today it is approaching the level of 1,0830. Virtually all of the upward movement related to the Fed's decision has been wiped out. Perhaps the markets have realized that the Fed may be on the path to lower interest rates, but there is no need to rush it. Of course, some market participants thought that The Fed may even make a complete U-turn and even decide to raise rates, if inflation rebounded. Even if inflation rebounds, it will most likely not be much and the current level of interest rates should be enough to limit price increases. Therefore, the direction of monetary policy seems to be one, but the key question seems to be the date of the first reduction.

There will be no rush with discounts

Not much has changed since Wednesday's decision and we won't know the data until next week PCE inflation, the one preferred by the Fed. Therefore, in a week it will be possible to answer the question whether the Fed can actually consider the "high for longer" approach. However, if inflation does not surprise, we will still have interest rate cuts starting in June. In turn, May will be crucial in terms of possible communication about the Fed's balance sheet. Since the discussion has started now, it cannot be ruled out that this will happen in May decision to reduce the pace of balance sheet reduction. Most likely, the slowdown itself will not begin until mid-year.

As you can see, the Fed's policy direction is rather clear, but there will be no rush with cuts. This is why there is no big reason for the dollar to be excessively cheap. Only a clear start on the path of reductions and a good attitude on the part of economies such as the euro zone, Great Britain or Japan will allow the currencies of these countries to appreciate against the dollar. However, it cannot be ruled out that the dollar will remain stable even with cuts, because, as seen in the latest Fed forecasts, economic growth in the US is expected to be really strong.

After 07:00 EUR/USD is quoted at 1,0837. In Poland we pay PLN 3,9751 for a dollar, PLN 4,3080 for a euro, PLN 5,0235 for a pound and PLN 4,4248 for a franc.

Source: Michał Stajniak CFA, XTB