It seems that there are no more Federal Reserve officials who want to keep monetary policy super-soft. Charles Evans, one of the most loyal representatives of the Open Market Committee, spoke yesterday, saying that accelerating the pace of interest rate hikes to combat inflation deserves discussion. This once again indicates the full readiness of the Federal Reserve System to act as aggressively as possible already at the May meeting. "The increase in the Fed's base rate by half a percent deserves attention. Most likely, this will happen in May of this year, when Fed officials next meet for a committee meeting," Evans said.
The Federal Open Market Committee of the Central Bank, which determines policy, usually raises the federal funds rate in quarter-point increments, as it was, for example, in March of this year. Recently, more and more representatives of the Central Bank have stated the need for more aggressive actions to combat inflation. This indicates the likelihood that the FOMC will decide to raise the interest rate in half-point increments.
The head of the Federal Reserve Bank of Chicago, who does not have the right to vote on FOMC decisions this year, said that the Central Bank needs to return the interest rate to a neutral level as soon as possible, which is in the range of 2.25-2.5%. According to Evans' forecasts, the Fed should reach this level by March next year, but he did not rule out that 2.25% could already be seen in December of this year. Back in March of this year, Fed officials made it clear that they expect rates to rise to 1.9% by the end of 2022 and to 2.8% by the end of next year. However, since then, officials have repeatedly stated the need to move faster, as more decisive action is required to suppress the highest inflation in four decades. The recent minutes of the Fed's March meeting showed that many of them were in favor of such a move last month, but against the backdrop of geopolitical tensions, they preferred a more cautious increase - by a quarter-point.
During his speech, Evans also spoke about the risks that the economy may face if rates rise too quickly. "We need to move to a neutral level, but without analyzing new data, it is quite risky to take more drastic measures," he said.
We are talking about inflation indicators. Today, a report on the consumer price index in the United States for March of this year is expected. Economists predict a jump in the annual rate to 8.5% immediately, compared to 7.9% in February. If the data exceeds economists' forecasts, it will have a certain negative impact on the bond market, as well as increase pressure on the US stock market, allowing the US dollar to strengthen its position against several risky assets.
By the way, the growth of the US dollar was also affected by the Fed's policy. When asked by reporters about the strengthening of the dollar in recent months, Evans replied that this indicates that investors understand where the Central Bank is moving. "I would say that the current position of the dollar indicates that US monetary policy is turning to a more neutral level, and we are going to do this faster than many of our colleagues from other central banks," he said.
It is obvious that a more aggressive Fed policy, especially if inflation in the US today goes beyond economists' forecasts, will continue to support the US dollar in the medium term. It is possible to expect the bearish trend in several risky assets to continue until the Russian-Ukrainian conflict turns towards settlement. As recent weeks have shown, this will probably happen in quite a while.
As for the technical picture of the EURUSD pair
Geopolitical tensions around Russia and Ukraine have again grown to a rather serious level, as Kyiv is delaying negotiations. Given the aggressiveness of the Fed's policy, it is best to bet on further strengthening of the dollar. To return the market under their control, euro buyers need a break above 1.0930, which will allow them to build a correction to the highs of 1.0970 and 1.1010. In the event of a decline in the trading instrument, buyers will be able to count on support around 1.0840, as it was at the end of last week. Its breakdown will quickly push the trading instrument to the lows: 1.0810 and 1.0770.
As for the technical picture of the GBPUSD pair
The pound has failed the lower boundary of the side channel and continues the bearish trend. Bulls need to think about how to return the resistance to 1.3040. A break in this range will open the way to 1.3105 and then to 1.3140. If the bears achieve a breakdown of 1.2990, you can safely catch the pound in the areas of 1.2950 and 1.2910. So far, nothing indicates that bulls will actively fight for the market even at current lows. The recently released data on the UK economy proved this once again.
