The Federal Reserve played its own cards very skillfully, allowing Treasury bond yields to rise, stock indices to fall, and EUR/USD quotes to plummet to a 5-month low. The Fed's "hawkish" pause turned out to be much more effective than the ECB's deposit rate hike. As a result, financial conditions in the U.S. have tightened, and victory over inflation is getting closer.

Before the FOMC meeting, the situation did not look attractive for the U.S. dollar. The markets were confident that Jerome Powell and his colleagues would keep the federal funds rate at 5.5% and predict another 25 bps increase by the end of 2023. Investors were surprised by the downgrade of the 2024 forecast from 4.6% to 5.1%, but they only made minor adjustments to their own estimates, from 4.6% to 4.8%. The market didn't fall for the Fed's bluff, but it sensed that going against it was a bad idea.

Federal Reserve's forecasts for the federal funds rate

The fact is that FOMC's estimates for GDP growth in 2023–2024 were significantly raised, and unemployment levels were lowered. Clearly, the central bank does not anticipate a recession. In such a scenario, the federal funds rate may not fall at all next year. As a result, the USD index will have the opportunity to close in the green for the fourth consecutive year—a very rare event. However, after a 9-week continuous decline of EUR/USD, it's hardly surprising.

The Fed's position looks very strong, but what if the central bank is wrong? The state of the economy could deteriorate sharply due to massive strikes in the automotive industry, government shutdowns pushed by Republicans, and, finally, the resumption of student loan payments. According to Goldman Sachs, this trio of events will lead to a slowdown in U.S. GDP growth from 3.1% to 1.3% in the fourth quarter.

Fed's forecasts for inflation and GDP

Can the ECB somehow influence the balance in the EUR/USD pair? I highly doubt it. Even the "hawks" on the Governing Council are not certain about further deposit rate hikes. Yes, they are trying to leave the door open for continuing the tightening of monetary policy, but it's not convincing so far. For instance, Joachim Nagel, president of the Deutsche Bundesbank, believes it is too early to say that rates have reached their peak. However, in his view, the ECB has already covered most of its journey.

Central Bank of Ireland governor Gabriel Makhlouf believes that even if inflation remains at its current level, borrowing costs may not necessarily rise. Rates may stay where they are for an extended period.

Thus, to forecast the future dynamics of the main currency pair, we continue to focus on North America. If the Fed's policy depends on data, then new statistics will determine the fate of the U.S. dollar.

Technically, the attempt by EUR/USD to break out of the fair value range of 1.063–1.083 has not been successful. If the support at 1.063 can be breached, shorts formed in the convergence area of 1.0715–1.073 can be increased.