U.S. Federal Reserve Chairman Jerome Powell, in his speech to the National Association for Business Economics on Monday, said a 0.5 percentage point rate hike could be possible at every central bank meeting if bank officials believe such moves are warranted to bring down inflation.
"We will take the necessary steps to ensure a return to price stability," Powell said. He was backed by Atlanta Fed President Raphael Bostic, saying the central bank will need to raise interest rates more aggressively this year to slow inflation. "Let me say clearly that getting the high rates of inflation under control is the top concern for me for 2022," Bostic said on Monday, noting that he now forecasts six rate hikes this year. He previously expected rates to be raised three times in 2022.
It is worth noting that the Fed has not raised the key rate by 0.50% since May 2000, which indicates its extreme concern about accelerating inflation in the U.S.
The military conflict in Ukraine against the backdrop of Western sanctions against Russia may lead to an even greater increase in energy and food prices around the world, which will cause increased inflationary pressure on the global economy. At the same time, the median level of consumer inflation expectations in the U.S. for the year ahead was 6.0% in February against 5.8% in January. And as we remember, from a recent report by the U.S. Department of Labor, the annual consumer price index (CPI) reached a 40-year high of 7.8% in February.
After Powell's speech, the yield on 10-year U.S. Treasury bonds rose sharply Monday and continued to rise Tuesday, reaching 2.328%, a new almost 3-year high. Note that prior to the Fed's decision to raise the interest rate by 0.25% at the meeting on March 15-16, the yield on 10-year bonds was 2.19%.
The dollar also strengthened on Monday and during today's Asian trading session, with the dollar index (DXY) hitting a 4-day high of 98.96.
Powell's next speech is scheduled for Wednesday (at 12:00 GMT), and market participants will be waiting for new signals from him regarding the Fed's monetary policy outlook. Probably, he will once again announce the readiness of the central bank's leadership to continue the policy of raising the interest rate, which may have a positive impact on the dollar.
Meanwhile, the dollar's main competitor in the euro currency market is declining, including in the EUR/USD pair.
In her speech at a financial conference on Monday, ECB President Christine Lagarde acknowledged that the prospects for monetary policy of the European Central Bank and the Fed diverge significantly. "Our two economies are in a different place in the economic cycle," Lagarde said. In her opinion, this was even before the start of Russia's military special operation in Ukraine, and "for geographical reasons, Europe is way more exposed (to the war) than the U.S.." She is scheduled to speak again today at 13:15 GMT) and is likely to reiterate her key messages that risks to the European economy are skewed to the downside.
According to many economists, the European economy is likely to face a recession, while the world is experiencing high energy and food prices, and the situation in this regard will only get worse. Moreover, the EU is preparing to consider the introduction of a new, fifth package of sanctions against the Russian economy. Among other things, the new measures may include the imposition of a moratorium on the import of Russian oil and gas. Although the position of European states on this matter is different, and Germany is very strongly opposed to this, the introduction of new restrictive measures against Russia will also negatively affect the European economy, which, according to many economists, is sliding into stagflation (this is a situation where an economic recession and high unemployment rate is accompanied by rising inflation).
Thus, the EUR/USD pair is likely to further decline. After the retest of the support level 1.1000 and its confirmed breakdown, the targets are 1.0900, 1.0800.
Technical analysis and trading recommendations
During the recent corrective growth (against the background of the weakening dollar), the EUR/USD pair managed to rise to the important short-term resistance level of 1.1130 (200 EMA on the 4-hour chart). The upper limit of the descending channel on the daily chart also passes through this mark.
However, further growth of EUR/USD stalled, and the pair again turned to the decline, during which it is trying to break into the zone below the psychologically significant support level of 1.1000.
Sooner or later, in our opinion, this will happen, and the pair will head inside the descending channels on the daily and weekly charts. Their lower boundaries are near the 1.0700 mark (2020 lows).
More distant downside targets are located at the support levels of 1.0500, 1.0350 (2015 and 2017 lows, respectively).
In an alternative scenario, corrective growth will resume, and after the breakdown of the resistance levels of 1.1130, 1.1175 (50 EMA on the daily chart), EUR/USD will head towards the key resistance level of 1.1460 (200 EMA on the daily chart) with intermediate targets at the resistance levels of 1.1285 (23.6 % Fibonacci retracement level in the wave of the pair's decline from the level of 1.3870, which began in May 2014, to the level of 1.0500), 1.1380 (local highs and 144 EMA on the daily chart).
A breakdown of the long-term resistance level 1.1560 (200 EMA on the weekly chart) will return EUR/USD to the zone of the long-term bull market with the prospect of growth to the resistance level of 1.1740 (200 EMA on the monthly chart).
Nevertheless, in the current situation against the backdrop of fundamental data, the situation in Ukraine and in our main scenario, short positions with entry into them from current levels or after the breakdown of the support level of 1.1000 remain preferable.
Support levels: 1.1000, 1.0960, 1.0900, 1.0850, 1.0765, 1.0700, 1.0500, 1.0350
Resistance levels: 1.1020, 1.1130, 1.1175, 1.1235, 1.1285, 1.1300, 1.1380, 1.1460, 1.1500, 1.1560, 1.1740, 1.1780
Trading Recommendations
Sell by-market. Sell Stop 1.0960. Stop-Loss 1.1030. Take-Profit 1.0900, 1.0850, 1.0765, 1.0700, 1.0500, 1.0350
Buy Stop 1.1030. Stop-Loss 1.0960. Take-Profit 1.1100, 1.1130, 1.1175, 1.1235, 1.1285, 1.1300, 1.1380, 1.1460, 1.1500, 1.1560, 1.1740, 1.1780
