The EUR/USD pair broke through the level of 1.1450 today, trading moderately higher. The traders' illogical reaction to the strong inflationary release suggests that we are dealing with a corrective pullback, which was provoked by the Fed Chairman's indecisive speech in the Senate. However, we believe that this is a quite weak argument for weakening the US dollar. Jerome Powell is not and has never been noticeable hawkish. His rhetoric was almost always cautious and prudent, while many of his colleagues have been gradually tightening their rhetoric lately. If earlier, there were only timid assumptions about the prospects for tightening monetary policy, then today, there are confident signals that the Fed rate will be raised three or four times this year. Such information is heard more and more often including from yesterday's dovish representatives of the Fed. The recorded growth in December US inflation has strengthened confidence that the US regulator will act decisively and aggressively this year.
Many Fed officials have voiced their opinions during the last few days since the so-called "silence regime" will start next week, that is, members of the Federal Reserve have no right to publicly declare their position 10 days before the meeting. Therefore, a lot of them are talking now before the January meeting. In particular, the head of the Federal Reserve Bank of Philadelphia, Patrick Harker, announced yesterday that his forecasts included three rate hikes this year, and he is ready to start this cycle at the March meeting. He noted that 7% inflation is awful news, so he is ready to support four rounds of increases this year. In his opinion, the reduction in the balance may begin after the rate significantly leaves the zero level.
Lael Brainard, who will soon take over as the Fed's deputy chairman, also said yesterday that inflation is too high. Despite the fact that she did not specify the algorithm for further actions of the regulator, the essence of her message was obvious. Brainard stressed that the Fed's monetary policy is currently fully focused on bringing inflation back to the target of 2%, which she believes is the most important task of the Central Bank today.
The head of the Federal Reserve Bank of San Francisco Mary Daly, who was previously a consistent "dovish", also supported the idea of raising the rate at the March meeting. Likewise, Daly didn't predict further growth rates, but she clearly stated that the Fed would not stop until inflation fell to the target levels.
As already known, the head of the Atlanta Fed, Raphaell Bostic, allowed four rounds of rate hikes this year even before the release of US inflation data. He also agreed that the increase cycle should begin already at the first spring meeting.
His colleague, the President of the Federal Reserve Bank of Cleveland Loretta Mester, who has the right to vote this year, said in an interview with The Wall Street Journal that the US economy had returned to full employment, but at the same time, faced inflation exceeding the target level. She added that she will support the first rate hike in March, while further rates of increase will depend on the economic situation.
Thomas Barkin and Esther George also provided hawkish comments, who agreed that the rate should be raised in March and then act according to the situation. In general, currency strategists of the Goldman Sachs conglomerate predict that the US regulator will raise the rate in March, June (the alternative is May), September, and December.
Such rhetoric and such forecasts amid record inflation growth will not allow EUR/USD buyers to reverse the trend. Therefore, there is now only a large-scale corrective pullback for the pair. It should also be recalled here that the European Central Bank continues to take a soft and wait-and-see position. The record growth of the EU's consumer price index does not bother the representatives of the ECB – most of them are confident that inflation has already reached its peak, and will steadily decline during 2022. In particular, ECB chief economist, Philip Lane, said yesterday that he does not observe dynamics that would indicate that inflation will consolidate above the ECB's target level in the medium term.
Technically, the EUR/USD pair has a "margin of correction" up to the resistance level of 1.1510 (the middle line of the Bollinger Bands indicator on the W1 timeframe). At the same time, it is unlikely that the buyers of the pair will consolidate above this target. The fundamental background does not contribute to a larger price increase – the divergence of the positions of the Fed and the ECB is still on the side of the US currency. Therefore, it is advisable to use the current upward surge to open short positions, with the first medium-term target at 1.1330 (the Tenkan-sen line on the weekly chart).
