It appears to have worked: credit spreads narrowed and market sentiment recovered. That this success came at the expense of the Greenback seems to make sense. First, the sheer size of the Fed’s effort exceeded that of other central banks. Second, that markets took this as credible buoyed sentiment and eased haven-seeking US Dollar demand.

This narrative may change as the calendar turns to 2021. While the pandemic continues, economic activity has begun a cautious recovery. It may sputter yet as case growth swells into the winter and a new wave of lockdowns disrupt commerce. Still, October saw the fastest manufacturing- and service-sector growth in over two years. The markets seem keen to believe that greener pastures are indeed ahead, spurred on by encouraging results for three competing Covid vaccines set to hit the market soon. A clear outcome to the US presidential election and a begrudging resignation to transferring power by the Trump administration have also helped soothe traders’ nerves.

A by-product of this optimism has been a shift away from dovish extremes on Fed policy bets, implying that the central bank may consider pulling back stimulus faster than previously thought. More of the same is likely if current trends bear out. Indeed, priced-in 2- to 5-year inflation expectations have already erased all of their Covid-linked plunges.

One major central bank unlikely to pace the Fed down this road is the ECB. Stubbornly sub-target price growth had the central bank flirting with exotic easing measures like negative interest rates well before the pandemic struck. The structural issues at play there are unlikely to have vanished.

A yawning gap between US and Eurozone breakeven rates underscores this, suggesting that the Euro may turn lower as the global monetary policy pendulum gradually retraces. Technically, early signs of topping may already be emerging at long-term trend resistance. A break back below 1.1880 may trigger an initial leg down toward the 1.16 figure.

EUR/USD MONTHLY CHART

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The central bank now expects the real gross domestic product to fall just 2.4% in 2020, compared to a decline of 3.7% predicted in September. The Fed also upped its 2021 real GDP forecast to 4.2% from 4.0% expected previously.

The Jerome Powell-led Fed estimates the unemployment rate to fall to 6.7% this year, further below the 7.6% previously predicted. The unemployment rate should fall to 5.0% in 2021, compared to the central bank’s previous estimate of 5.5%.

The Federal Open Market Committee said in its statement Wednesday that it would continue to buy at least $120 billion of bonds each month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”

The Fed kept its inflation estimates for 2020 unchanged at 1.2%. The FOMC now sees PCE inflation running to 1.8% next year, slightly above its previous estimate of 1.7%.

Core PCE inflation is expected to come in at 1.4% this year, down slightly from September’s projection of 1.4%. Next year, core PCE inflation is estimated to reach 1.8%, up from September’s forecast of 1.7%.

The Fed decided to keep interest rates unchanged in its December meeting after slashing them to near-zero in an emergency meeting in March due to the fast-spreading coronavirus.

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