The euro and the pound sterling dropped yesterday in response to the July minutes of the Federal Reserve. Officials were concerned about inflation and whether it could continue to decline in the near future. Given this, it is clear that there might be a need for further interest rate hikes. Yet, not all members of the Federal Reserve are hawkish. The minutes read that "most Federal Reserve officials still see inflation risks and the potential need for higher rates." However, two Fed officials argued for keeping rates unchanged instead of the hike, which the Federal Open Market Committee ultimately approved at the end of the meeting.
The July FOMC minutes highlight the tension between faster-than-expected falling inflation and economic growth, which exceeded the central bank's forecast. Notably, in July, the rate was raised to the range of 5.25–5.5%. This followed a strict policy after officials kept rates unchanged at the meeting in June.
Although the Federal Reserve's final decision shows unity on interest rates, the minutes confirm there is a dovish faction advocating for a softer approach, especially considering credit issues. Some committee members, like the president of the Philadelphia Fed, Patrick Harker, recently stated that the central bank might not need to continue raising rates. Others, including Federal Reserve Governor Michelle Bowman, have the opposite view.
Chairman Jerome Powell has recently emphasized that the Federal Reserve will make decisions from meeting to meeting based solely on new fundamental data. "So we intend, again, to keep policy restrictive until we're confident that inflation is coming down sustainably to our 2 percent target, and we're prepared to further tighten if that is appropriate," Powell told journalists on July 26.
Judging by futures contracts, investors currently do not expect another rate hike this year. However, the chances of a hike at the meeting in November are higher than those for the September 20 meeting. Investors also believe the Federal Reserve will start cutting rates in 2024, with the key interest rate dropping to around 4.25% by the end of the next year. This makes the upcoming speech by the Federal Reserve chairman in Jackson Hole, Wyoming, next week, particularly interesting.
Regarding today's technical picture for EUR/USD, the pressure on the euro remains the same. To regain control, buyers should keep the price above 1.0890. This would pave the way to 1.0920 and allow the pair to test 1.0950. From there, the price may climb to 1.0980. However, it would be quite difficult without support from major traders. If the pair drops, I expect significant actions from major buyers only around 1.0860. If they fail to be active, it would be wise to wait for a low of 1.0840 or consider long positions from 1.0810.
Meanwhile, the pound sterling continues trading within the channel. The pound sterling will rise only after bulls gain control over the 1.2725 level. Regaining this range will boost hopes for recovery to 1.2760 and 1.2210, after which we can talk about a surge to around 1.2840. If the pair falls, bears will attempt to take control of 1.2690. If they succeed, a breakout of this range will hurt bulls' positions and push GBP/USD to a low of 1.2660, with the potential to drop further to 1.2620.
