Even though Fed officials concluded that the central bank should ease the pace of interest rate hikes soon, the European currency stopped at one-month highs and failed to hit them. The pound sterling fared much better, as bulls continue to actively buy it, hoping that the gap between the interest rates of the Fed and the Bank of England will narrow.
This week has seen quite a few speeches from Fed policymakers who have suggested that a slower pace of monetary tightening might soon be more appropriate. Maintaining aggressive policy could seriously damage an economy that is already signaling trouble.
During the last press conference in November, Fed Chairman Jerome Powell said that rates are likely to rise even higher than what was reflected in the projections made by Fed officials in September. Furthermore, Fed staff economists that the risk of a recession in the US had risen to nearly 50%. This was the first such statement since the US central bank began raising rates in March.
At the most recent meeting, the FOMC raised the key interest rate for the fourth time in a row by 75 basis points to 4%, extending its most aggressive tightening campaign since the 1980s to combat the highest inflation in 40 years. Investors now expect the Fed to hike rates by only 50 basis points at their December meeting. The rate is expected to peak at around 5% by mid-2023.
Rumors are now circulating in the market that Fed members are deeply worried about the US economy slowing down. Obviously, everyone expected this, but no one anticipated that it would happen so fast. Recently, manufacturing and services PMI were strong – now, PMI indexes have begun to drop dramatically. Jobless claims jumped notably this week, also signalling trouble in the labor market. However, that was merely one weekly data release. Furthermore, the situation in the real estate market has also been severe due to the high mortgage rates. After the November meeting, the economy showed modest growth with some signs of lower inflation while demand for labor remained strong. Employers added 261,000 jobs last month and the unemployment rate went up slightly to 3.7%, although it remains very low in historical terms. Fed officials are likely to agree to a slower pace of rate hikes, which will allow the central bank to assess progress toward its goals.
The fact that the FOMC minutes show a rather strong dovish bias will benefit risky assets and lead to a new wave of gains for the euro and the pound sterling. As mentioned above, there is a marked consensus on slowing the pace of rate hikes in the committee – that is the main standpoint advocated by Fed vice chair Lael Brainard. However, it is too early to tell if the other members of the committee will support it. Certainly, everything will depend on the November inflation data, which the Fed will get its hands on before its last meeting of the year.
On the technical side, pressure on the US dollar eased yesterday, weighing down on the euro near its monthly high. To continue going up, EUR/USD needs to break above 1.0430, which will drive the trading instrument to 1.0480 and 1.0530. The pair may easily climb to 1.0570 above this level. If the pair declines and breaks below the support level of 1.0390, it will drop back to 1.0340, increasing the pressure on EUR/USD. From there it could fall to the low of 1.0290.
As for the technical picture of GBP/USD: the pound sterling continues to advance and has soared above the monthly highs once again. Bulls are now clearly focused on defending support at 1.2060 and breaking above 1.2135, which is limiting the pair's upside potential. Breaking above this level will make further recovery to the area of 1.2180 more likely. After that, the pound sterling will have a chance to grow sharply towards 1.2230. If bears take control over 1.2075, it will strike a blow to the bulls' positions and push GBP/USD back to 1.2020 and 1.1960.
