Euro is gradually losing ground after a rapid growth yesterday caused by a slowdown in the US manufacturing and services sectors. The contraction is bad in the face of the current Fed policy, which was set to be tighter in order to curb high inflation.
US politicians have already made a number of statements to prepare investors for what is clearly not what many would like. Minneapolis Fed President Neil Kashkari, for instance, said that US inflation is very high and the central bank must take action to bring it back under control. Of course, the government does not want the economy to slide into recession, but there is no other way to combat the current inflationary pressures. In recent reports, consumer prices in the US have risen 8.5% y/y, while personal consumption expenditures jumped to 6.8% y/y.
Before the coronavirus pandemic, Kashkari was the Fed's most outspoken dovish politician. But in recent months, he has become hawkish because of the serious situation with inflation. In an attempt to bring down the figure, the Fed raised interest rates by 75 basis points in the last two meetings. Many believe that this could happen again at the meeting in September.
Tomorrow, Fed officials will head to Jackson Hole for the annual conference, which will be attended by central bankers from around the world. Chairman Jerome Powell will have a chance to depressurise financial markets over future interest rate movements.
Going back to the forex market, pressure on euro remains despite yesterday's correction. The bulls need to correct the situation very quickly and stay above 0.9940 because without this level, the problems will only increase. Going beyond 0.9940 will give confidence to buyers and will open the chance to reach 1.0000 and 1.0130. But if sellers become more active, EUR/USD quotes will fall from 0.9860 to 0.9820.
In GBP/USD, buyers need to stay above the nearest support level of 1.1790, otherwise, the pair will decline to 1.1760 and 1.1720, then to 1.1680 and 1.1640. The bearish scenario will end only after the breakdown and consolidation above 1.1870. In that case, quotes will move towards 1.1920 and 1.1970.
