29.01.202009:38 Forex Analysis & Reviews: EUR/USD: The Fed will leave its key rate unchanged today. What will happen to the support for overnight rates is the big question. Will the Central Bank inflate its balance sheet even more?

Today, all the attention of traders and investors will be focused on the US Federal Reserve's decision on interest rates. While many economists are confident that the Fed will leave rates unchanged, a more important point during the meeting may be the issue of controlling short-term interest rates. We are talking about REPO operations that have been carried out since the fall of last year to support overnight rates at their levels. This problem was created as a result of the lack of liquidity, when banks and other large companies were unable to obtain the necessary funds, resulting in an increase in short-term rates. Right now, there is no problem with short-term loans, but the central bank's managers, as always, have a headache as to how and when to complete these operations.

Although the Fed categorically denies this phenomenon, it has been repeatedly noted that this kind of stimulus indirectly coincides with the QE programs that the Fed conducted during and after the 2008 crisis. REPO operations could stimulate and accelerate the growth of stock markets, which was particularly active at the end of last year. Currently, the asset purchase program has already inflated the central bank's balance sheet to $ 4.1 trillion, from its $ 3.8 trillion in September last year, when this program started. Whether such operations will be maintained is also a very important point, as their reduction may seriously affect the US dollar's exchange rate.

Returning to the topic of interest rates which are unlikely to be changed, it is necessary to mention US President Donald Trump's statements yesterday, in which he once again called on the Fed to get smart and lower interest rates. Such a step will make US competitive against other countries.

As for the fundamental statistics that helped the dollar win back some positions against the euro and the pound yesterday, special attention should be paid to the demand for durable goods in the United States. It increased in December 2019, where most of the increase was related to defense spending. According to the data from the US Department of Commerce, orders for goods with a service life of at least three years in December increased by 2.4% as compared to November, while economists had expected a drop of 0.3%. In addition, orders for defense capital goods increased by 90.2% compared to the previous month.

Data on consumer confidence in the United States, although much better than economists' forecasts, became a clear opportunity for buyers of the US dollar, who took profits before the Fed's important meeting. The said scenario led to the growth of the EUR / USD pair in the second half of the North American session. At the same time, according to the Conference Board, the consumer confidence index rose to 131.6 points in January 2020, up from its 128.2 points in December, while economists had expected the index to be at 128.0 points. Consumers were more positive about their situation, as well as the business environment and the labor market. Thanks to the optimism in the labor market and employment prospects, expectations for future conditions have also increased.

It is not surprising that in November of this year, the pace of growth in US house prices accelerated. The reason for this is the more affordable mortgage, and a decrease in the Federal Reserve's interest rate system. It is already obvious that the US housing market will continue to gain momentum, after a weak start in 2019. According to S & P / CoreLogic / Case-Shiller data, home prices in November rose by 3.5% compared to the same period the previous year, after rising by 3.2% a month earlier.

Returning to the issue of manufacturing activity, a fairly good report from the Federal Reserve Bank of Richmond was published yesterday. According to the regulator, the Fed-Richmond production index jumped immediately to 20 points in January 2020, against its -5 points in December. All subindexes have also grown, with the exception of some that relate to local business conditions.

As for the technical picture of the EUR / USD, the pair remained unchanged, as the bears failed to push through the 1.1000 support. Talks about the recovery of euro is possible, only after the fixing of the price above the highs of 1.1035. But for now, the trend is on the side of the sellers of risky assets, which opens a direct road to the lows of 1.0980 and 1.0960.