Talk about inflation is starting to creep through the market again, especially after a series of data released recently on the eurozone countries. All this leads to expectations that central banks will again take a number of more aggressive measures aimed at combating price increases. Yesterday, the head of one of the banks of the Federal Reserve, Christopher Waller, said that he expects a further increase in interest rates in the United States by at least 50 basis points.
He noted that he supports raising interest rates above the "neutral" level, which is currently set by the Fed at about 2.5%. According to him, this will help curb price increases, only slightly reducing consumer demand and at the same time not causing a serious economic downturn. Waller also believes that it is necessary to stick to a further series of interest rate hikes until the end of the year, since only in this case can we count on curbing inflation.
Let me remind you that last week rumors began to spread that the central bank may take a break in the cycle of raising rates and tightening monetary policy in the fall of this year. However, as the latest data show, it will be quite difficult to do this, given the increasing inflationary pressure. Most recently, a report was released that showed that in the United States, the main price index of personal consumption expenditures — the Fed's preferred measure of inflation — increased by 4.9% in April compared to last year. The data turned out to be higher than economists' forecasts, which, as I think you understand, does not calm politicians in any way, forcing them to look for new ways to combat inflation.
According to the average estimate of Fed officials provided in March, a neutral level of 2.5% means at least an increase of another 2 percentage points. Now a number of politicians are focusing on the need to obtain the results of their actions taken in the early spring of this year to combat inflation. Over a longer period, it will be possible to understand how monetary policy affects demand and how the inflation rate decreases at the same time. Waller believes that if the data received at the beginning of this summer, will testify that inflation is still continuing to grow – it will be necessary to act more aggressively.
The minutes of the May meeting enshrine similar principles. The summary of the meeting stated that the restrictive position of the Fed's policy may well become appropriate depending on the changing economic prospects and risks. At the moment, it is expected that the Fed will continue to raise the key interest rate on loans to the level of 2.5-2.75%, which corresponds to a neutral rate. However, if inflation continues to rise, the Fed is likely to go even further. The federal funds rate is currently set between 0.75% and 1%.
As I noted above, the situation in the eurozone with inflation also leaves much to be desired. The flagship of the European economy, Germany, has recently marked record growth figures. According to the report, a sharp rise in energy and food prices has led to a new record level of inflation. Consumer prices in the continent's largest economy jumped by 8.7% in May this year compared to last year. Analysts had forecast growth of only 8.1%.
After updating the next local high, the pressure on the euro returned. Expectations of a more aggressive policy of the Fed limits the upward potential of risky assets. In the short term, it is best to bet on a major downward correction of the pair, which occurred amid profit-taking at the end of this month. However, to stop the bearish movement, it will be enough for bulls to protect the nearest support of 1.0700. If you miss it, most likely, the bears will push the trading instrument to new lows: 1.0660 and 1.0630. A more distant target will be the support of 1.0590. Now it is possible and necessary to talk about a new wave of euro growth, but it is necessary to act with your head. To resume the bull market, you need to go above 1.0740, after which you can count on a breakthrough of 1.0790. From there, the road opens up to 1.0820 and 1.0850.
As for the British pound, the situation there is exactly the same – a downward correction can lead to a temporary stop of the bull market and the trading instrument staying within the horizontal channel at 1.2550-1.2660. Much will depend on the hawkish policies of Bank of England Governor Andrew Bailey. It is unlikely that amid a rapidly weakening economy, he will announce aggressive measures to increase the cost of borrowing, but even if this happens, demand for the pound is unlikely to return. Buyers of risky assets will defend 1.2585, in case of a breakthrough of which we will see a rapid movement at 1.2550. The medium-term bearish trend has not gone away, and the observed correction can end very quickly - just give the big bears a reason. The reason may be the limited policy of the Bank of England due to the slowdown in economic growth. In the short term, I advise you to buy the pound on pullbacks to the downside, as it is possible to strengthen the bullish presence. The nearest resistance levels are now located around 1.2620. A breakthrough in this range will lead to an instant breakthrough of the trading instrument at 1.2660 and 1.2690. A breakthrough of 1.2550 will strengthen the bear market, which will open the way to new lows: 1.2510 and 1.2480. The furthest goal in the current conditions will be the support of 1.2430, the test of which will put an end to the bullish potential of the pound in the near future.
