Yesterday's data from the United States and comments from American policymakers dragged the euro to its one-year low against the dollar. The recent remarks by Minneapolis Federal Reserve Bank President Neel Kashkari had an adverse impact on risk assets, which in turn exerted pressure on stock indexes. Kashkari believes there is nearly a 50-50 chance that interest rates will need to move significantly higher to bring down inflation. According to the official, price pressures may well increase again. "Such a scenario suggests continued growth featuring strong consumer spending and "the economic flywheel spinning," he added.
Even though inflation is currently decreasing at a rapid pace, the future could see the consumer price index staying above the Fed's 2% target, posing a challenge for policymakers. "The case supporting this scenario is that most of the disinflationary gains we have observed to date have been due to supply-side factors, such as workers reentering the labor force and supply chains resolving, rather than monetary policy restraining demand," Kashkari noted.
Highlighting that interest rate-sensitive sectors, like housing and automotive ones, remain robust despite the Fed's tightening, Kashkari questioned whether the policy is indeed as tight as it seems. Inflation in the services sector, excluding the cost of renting shelter, has been coming down but has otherwise remained elevated, raising long-term concerns. "Once supply factors have fully recovered, is policy tight enough to complete the job of bringing services inflation back to target? It might not be, in which case we would have to push the federal funds rate higher, potentially meaningfully higher," the official said. "Today I put a 40 percent probability on this scenario."
Given this backdrop, it is not surprising why the euro and other risk assets continue to lose ground against the US dollar. Speaking of the EUR/USD pair, buyers will likely try to take the lead around the annual low. However, whether this level will hold firm remains to be seen in the near future. As for the GBP/USD pair, no significant changes are anticipated as buyers' trading activity is subdued.
Now let's move on to the EUR/USD forecast for today. From a technical point of view, euro bears will probably keep dragging the euro down. To regain control of the market, buyers need to protect the 1.0510 level. Its breakout will make it possible to advance to the 1.0545 mark. In this case, the euro will have a chance of rising to 1.0580 with support from major players. In a bear case scenario, large bulls are likely to take active steps only at around 1.0480, after the price hits a new one-year low. If trading activity in this area is low, it would be a wise decision to wait for the price to hit a fresh low at 1.0440 or go long at 1.0380.
Speaking of the GBP/USD pair, the British pound remains under pressure. Gains are possible only after the price consolidates above the 1.2160 level. In this case, one can count on a recovery to 1.2200 and then probably 1.2240. If the pair goes down, bears will attempt to take control of the 1.2115 mark. In case the price breaks below this level, the British pound will most likely dip to the low of 1.2070 and even 1.2030.
