Markets bet on changes in the Fed's policy as early as this year. This week, Jerome Powell may confirm the fact that the Fed will slacken the pace of the key interest rate hike in December 2022. He may also remind US citizens that the combat against inflation will last until 2023.
Jerome Powell is going to provide a speech devoted to the issues of the labor market. The event organized by Brookings Institution in Washington will take place on Wednesday. It will be one of the last speeches provided by politicians before the FOMC meeting on December 13-14. Powell will have a chance to alter the recent announcements about the FOMC's plans to raise the benchmark rate by 50 basis points after four consecutive increases of 75 basis points.
However, a lot will depend on the inflation figures for November. Any negative changes can affect the decision and make the Fed return to the hawkish policy. Given that inflation is still above the central bank's 2% target, the speech is likely to contain comments about lower interest rate hike paces and its further rise. The interest rate is currently at its highest level last seen 15 years ago.
There are also those who believe that Powell can use his speech to maintain a hawkish approach, paying attention to the labor market, which has not yet seen serious problems even against the backdrop of such high interest rates. Thus, Powell can take advantage of this moment and use the dynamics of the labor market as a reason why they need to continue their tough policy. Nevertheless, most investors expect the Fed to slow down its monetary policy tightening next month. They also think that the benchmark rate may reach its high of 5.00% next year.
Although the Fed chairman may hint about a looser approach to further rate hikes, he may also remind the markets that the regulator is not going to change the policy abruptly and will continue tightening until there is convincing evidence of a steady decline in inflation.
The meeting minutes for November 1-2 unveiled that officials support some changes in the policy. Most of them agree that soon it could be necessary to slow down the pace of the interest rate increases. The fact that there is a fairly strong dovish trend in the FOMC protocols will prop up risky assets and lead to a new wave of growth in the euro and the British pound. As I have mentioned above, there is a noticeable agreement in the committee to slow down the pace of rate hikes. This is the main point of view supported by Vice-Chairman Lael Brainard. However, it is too early to say that the other members of the committee will also support it.
In September, officials expected the key interest rate to hit 4,4% by the end of the year and 4.6% by the end of 2023. The outlook will be adjusted next month.
From the technical point of view, pressure on the US dollar weakened, thus capping a rise in the euro near its monthly high. To continue rising, the euro should break above 1.0390 and 1.0430. This will allow it to climb to 1.0480 and 1.0530. Then, the price may easily jump to 100570. In case of a decline, only a breakout of the support level of 1.0340 will push the price to 1.0290, thus increasing pressure on the pair. In this case, the asset may slide to the low of 1.0260.
Meanwhile, the pound sterling is keeping its position. The recent downward correction does not mean anything. Now, buyers are trying to protect the support level of 1.2030 and return to 1.2080. The level was lost during the Asian trade. A breakout of 1.2080 will allow the pair to climb to 1.2130.
Then, the pound sterling may even jump to 1.2180 and 1.2230. If bears gain control over 1.2030, pressure on the asset will return. In this case, the pound/dollar pair will slide to 1.1960.
