The euro tumbled against the US dollar while the British pound tested new yearly lows. Risk assets are coming under pressure again which is hardly surprising as the majority of Fed's policymakers, including Fed Chair Jerome Powell, admit the importance of furter rate hikes.
John Williams, the president of the Federal Reserve Bank of New York, said he saw the need for further rate hikes until inflation was subdued. He also noted that he belongs to the higher-for-longer camp when it comes to monetary tightening. "We're going to need to have restrictive policy for some time," he said in an interview. "This is not something we're going to do for a very short period and then change course."
Many other Fed officials made similar comments this week. They mainly commented on Powell's "for some time" phrase to describe his expectations for the key interest rate. In his speech at the Jackson Hole economic symposium in Wyoming, the chief of the US central bank said that "the historical record cautions strongly against prematurely loosening policy."
Along with Fed Vice Chair Lael Brainard, Powell and Williams make up a strong coalition that shapes the views of other committee members. Their main goal for now is to tackle inflation that is running at its highest level in more than 40 years and is well above the Fed's target of 2%.
Unlike Brainard, Williams didn't specifically say where he would like to see rates go. But he did note that he believes reducing inflation will require real interest rates — nominal levels minus inflation — to be positive. The Fed funds rate is currently staying in the range between 2.25% and 2.5%, which is well below the central bank's preferred core personal consumption expenditures price index inflation gauge, which was at 4.6% in July. "I do think with demand far exceeding supply, we do need to get real interest rates ... above zero," Williams said. "We need to have a somewhat restrictive policy to slow demand, and we're not there yet," he continued.
According to the CME Group data, the futures market expects the Federal Open Market Committee to approve a third consecutive rate hike of three-quarter points in September. Then, it will continue with a half-point raise in November and a quarter-point hike in December. The cutting is expected no sooner than the fall of 2023.
As for the technical outlook for EUR/USD, there is a high risk of a future sharp fall as the pair is still trading below parity. Bulls need to fight for the 1.0000 level where bears are fiercely fighting back. Otherwise, the instrument is unlikely to recover. A break above 1.0050 will support the buyers of risk assets and will pave the way towards 1.0090. The level of 1.0130 will serve as the most distant target. In case the euro declines, bulls will intensify their activity at 0.9950. If they lose this chance, the upside correction will be canceled. Bears may regain ground at this point and may push the price towards 0.9905 and 0.9860.
In the meantime, the pound is holding below the 1.16 area which is a strong obstacle for bulls. A strong upside correction is very unlikely, especially if bears take control over the level of 1.1515. Buyers need to do their best to hold above this range. Otherwise, they will face another massive sell-off to the area of 1.1470. Its breakout will open the door to the low of 2020 found at 1.1410, which was retested during the peak of the coronavirus crisis. Consolidation above 1.1560 will validate an upside correction that will allow the pair to recover to 1.1600 and 1.1650.
