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FX.co ★ EUR and GBP falling despite Fed's decision to hit pause button

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Forex Analysis:::2023-06-15T11:00:55

EUR and GBP falling despite Fed's decision to hit pause button

Both the euro and the pound sterling sank against the US dollar which came as a surprise to many rookie traders. As a rule, a pause in the cycle of rate hikes should assure traders to increase long positions on the euro against the US dollar. Indeed, the latest policy move could arouse speculations that the Federal Reserve could decide to lower borrowing costs in the visible future that will overshadow the greenback's luster. How come did it happen that the euro and the sterling weakened in light of the long-awaited pause in monetary tightening? The answer can be found in the comments by Federal Reserve's Chairman Jerome Powell.

EUR and GBP falling despite Fed's decision to hit pause button

Yes, Federal Reserve officials have suspended their series of rate hikes, but the expected borrowing cost is likely to be higher than previously projected. Chairman Jerome Powell defined inflation as remarkably resilient, and once again drew attention to the strength of the labor market, which is hard to argue with.

Speaking to reporters at a press conference on Wednesday, Jerome Powell faced the daunting task of explaining two polar opposite policies. The same is true for traders. The decision to put interest rates on hold after 10 straight raises defied expectations after Powell announced that at least two more rate hikes could be needed this year. The next of these two will probably happen as early as July this year. "Overall, the committee saw fit to ease the pace a bit," Powell said. "It gives us more information to make decisions. We want to make better decisions, and for that, we needed a break. The break will give the economy a little more time to adjust while we make decisions going forward." To sum up, "Yes, we had some kind of plan, and we stuck to it."

However, as many economists have pointed out, the surprisingly high inflation forecast may signal a return to the Fed's strategy of cooling a resilient economy. In contrast, slowing the interest rate cycle from last year's aggressive pace is a strategy that has been derailed by a string of banking crashes in March of this year. The suspension of rate hikes while signaling further potential increases gives the Fed maximum flexibility. As such, the Fed is expected to set the stage for a fresh move higher if summer data remains hot. Besides, the Fed could allow itself to easily reverse the course if inflation continues to ease.

As for the forecasts, the policymakers left the official funds rates in the range of 5% to 5.25%. On the back of recent economic data stronger than expected and inflation slowing in some areas, officials raised their expectations about how much more they need to do to contain inflationary pressure. The Fed's median estimate now is that interest rates will rise to 5.6% by the end of this year, implying two more quarter-point increases from 5.1% delivered in March.

This strategy definitely puts pressure on the euro and the British pound and keeps the US dollar in demand. Indeed, two rate hikes will be delivered over a long interval for currency traders.

As for the technical picture of EUR/USD, to maintain control, the buyers need to protect 1.0780 and take out 1.0820. This will allow them to get out to 1.0865. Already from this level, it is possible to climb to 1.0910, but it will be complicated to do it without the hawkish policy of the European Central Bank. In case EUR/USD declines to the area of 1.0780, I expect some serious actions from large buyers. If no one is there, it would be a good idea to wait for a new low at 1.0730 or go long from 1.0700.

As for the technical picture of GBP/USD, the demand for the pound remains buoyant. It will be possible to count on the growth of the pair after the bulls take control of 1.2670. Only a breakout of this level will strengthen hopes for a further recovery to the 1.2710 area, after which it will be possible to predict a sharper spike of GBP/USD to the 1.2760 area. If the currency pair falls, the bears will try to take control of 1.2620. If successful, a breakout of this range would hit the bulls' positions and push GBP/USD to a low of 1.2570 with the prospect of a move lower to 1.2530.

Analyst InstaForex
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