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Fed to refrain from liftoff until 2023

The Federal Reserve’s March meeting was widely anticipated as a high-profile event, but it actually turned out to be even more impressive, stoking elevated volatility in the EURUSD pair. While the regulator held interest rates steady in the target range of 0-0.25%, as predicted, the tone of the accompanying statement and forecasts for the key macroeconomic parameters caught the market off guard.

Notably, the Fed sees the economy picking up momentum, but the long-term trajectory of the recovery will largely depend on the epidemiological environment. Until significant progress is made on economic targets, the Fed will continue to purchase $80 bln in Treasury securities and $40 bln in mortgage-backed securities on a monthly basis.

Powell’s forecasts came as a pleasant surprise as US GDP in 2021 was projected to expand by 6.5%, up from the previous expectation of 4.2%, and should grow by 3.3% in 2023. The unemployment rate will drop to 4.5% this year and to 3.9% in 2022. Inflation this year is expected to run at 2.4%, while earlier it was seen at no more than 1.8%.

Importantly, so far there is no talk of a rate liftoff and in our view, the regulator looks set to press ahead with its ultra-soft monetary policy at least until 2023. In line with expectations, the average median interest rate in 2021-2022 and 2023 will be 0.1%, but then it will approach 2.5%. This will not be anytime soon, much to the chagrin of the dollar bulls. On Thursday, March 18, EURUSD has been trading around 1.1960, nursing mild losses as the dollar shakes off yesterday's bout of heightened volatility.

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