The euro is creeping to 1.0200 and the pound sterling is testing the levels above 1.2000, proving exaggerated optimism of market participants who are taking advantage of the pause in the stream of fundamental statistics from the US. Last week, both EUR and GBP sank to their one-year lows, but traders rushed to buy them on Friday. The remarks from some Fed policymakers dispelled fears that the US Fed might raise interest rates by 100 basis points in July. So, such speculations were nothing but rumors.
Besides, ex-member of the Fed board Randal Quarles spoke yesterday. He pointed out that the Federal Reserve should have begun raising interest rates before it finished its bond-buying program. This policy would have allowed the regulator to take measures against inflation in a due time. The Fed policymakers found it appropriate to withdraw the stimulus program in a predictable manner and to evade market volatility, Randal Quarles commented in the interview.
From his viewpoint, it is common practice in the Federal Reserve to terminate the stimulus program, i.e. bond purchases, before they start increasing interest rates. Nevertheless, they should have made an exception in this situation and launched a series of rate hikes in the autumn 2021 as soon as it became clear that inflation was a problem beyond the US. "I think that in those circumstances, for a limited period of time, to have said, "Yes, tapering the balance sheet has tohappen over an extended period of time to avoid disrupting markets, but we're going to begin raising interest rates even before that taper is complete because now is the time to move more aggressively in the response to inflation. Market volatility is way higher nowadays, and hardly anyone doubts that the economy will slip into recession next year," Randal Quarles said.
Let me remind you that the US central bank began scaling down its bond purchases in November 2021 and completer tapering in March 2022. The first rate hike was announced also in March. For the time being, the central bank is trying to catch behind, thus raising interest rates aggressively and reducing its balance sheet. Last month, the Federal Reserve increased the funds rate by 75 basis points which is the sharpest rate hike since 1994. They are likely to do the same at the nearest policy meeting next week.
Last week, during his speech, Atlanta Fed President Rafael Bostic told reporters that the FOMCwas determined to fight as much as possible with further price pressure after it became known that consumer prices in the United States rose faster than expected by 9.1% on a yearly basis.
Cleveland Fed President Loretta Mester declined to say directly in an interview whether she was in favor of raising rates by 1.0% at once at the July meeting, only noting that politicians have all the necessary data at their disposal to make a decision. Mester added that she sees no reason not to raise rates by less than 75 basis points. "All I understood from the report was that it was bad," she said.
If we talk about the technical prospects of the euro, then a significant upward correction in the area of 1.0200 is gradually coming to an end. It will hardly be possible to talk about a more global uptrend when the meeting of the Federal Reserve is just around the corner. It is unclear how the members of the rate-setting committee will behave at it. A rebound to 1.0200 will help the bulls tocontinue the correction, but this will require a lot of effort. If we see consolidation at this level, then prospects for recovery to the area of 1.0270 and 1.0340 will open. If the euro falls, it is very important for buyers to show up at around 1.0120. Otherwise, the pressure on the trading instrument will only increase. Having missed 1.0120, you can say abandon hopes for the recovery of the pair, which will open a direct path to 1.0080. A breakout of this support level will certainly increase pressure on the trading instrument, opening up an opportunity to test 1.0040.
The pound corrected well, but further growth is in question. It is possible to talk about a larger upward correction in the current conditions, but only after the bulls push the price above the resistance of 1.2030. Only after that, you can count on a breakout to the area of 1.2080, where buyers will face much more difficulties. In the case of GBP's larger upward movement, we can talk about updating 1.2120 and 1.2160. If the bears break below 1.1940, then the way will be open to 1.1900. Going outside of this range will lead to another downward move towards the 1.1810 low.
