Jerome Powell will make his first appearance in the US Congress tomorrow, and the following day will be his second. Usually, these speeches do not differ significantly from each other, and some even have access to the speech texts in advance. Undoubtedly, market reaction and the dynamics of the dollar will depend on the Federal Reserve's (FRS) president's speeches on Wednesday and Thursday. However, in my view, it will be extremely challenging for Powell to surprise the market and policymakers. Here, everything will depend on the congressmen themselves, who will have the opportunity to ask Powell any questions.
In my opinion, the CME FedWatch tool very accurately displays the probability of a rate change at a particular meeting. And now this tool only says that the probability of a rate cut in March and May is minimal. Almost all FOMC members said in February that there was no need to rush into the first round of monetary easing. In reality, the first rate cut may happen even later than June, as some experts of some large banks and corporations are already talking about.
For example, Torsten Slok, chief economist at Apollo Global Management, believes that the Fed will not cut rates at all in 2024. It is certainly very difficult to believe this now, but in January, too, no one believed that the first easing would occur later than March. Slok believes that the U.S. economy is not slowing down to the extent that the FRS needs to rush. At the same time, rate cuts stimulate the economy even more, which can lead to a further acceleration of inflation.
Slok thinks that the problem for the FRS now is not so much inflation but strong economic growth and the labor market, which can hinder the process of slowing down consumer prices or constantly "fuel" it. Based on this, I would not be sure even about a rate cut in June. Moreover, some analysts believe that the European Central Bank (ECB) may move to easing before June.
In the end, we get a divergence in interest rates between the ECB and the FRS, but now in the opposite direction. In the near future, the market may begin to change its expectations in favor of the ECB being the first to start easing. Even without this factor, demand for the European currency should decrease, and for the U.S. currency, it should increase. But each new "dovish" factor from the ECB and "hawkish" factor from the FRS will add even more confidence to these expectations.
EUR/USD Wave Analysis:
Based on the analysis of EUR/USD, I conclude that the construction of a bearish wave set continues. Wave 2 or b has taken a completed form, so in the near future, I expect the continuation of building the impulsive descending Wave 3 or c with a significant decrease in the instrument. Currently, an internal correction wave is being built, which may have already ended. I continue to consider only sales with targets around the calculated level of 1.0462, which corresponds to 127.2% on Fibonacci.
GBP/USD Wave Analysis:
The wave analysis of the GBP/USD instrument still suggests a decline. Currently, I consider selling the instrument with targets below the level of 1.2039 because I believe that Wave 3 or c will sooner or later gain momentum. A successful attempt to break the level of 1.2627 became a selling signal. However, at this time, I can also highlight a new sideways trend with the lower boundary at the level of 1.2500. This level is currently the limit for the pound's decline. I can also highlight a descending corridor, which indicates the preferred decline in quotes.
Key Principles of My Analysis:
- Wave structures should be simple and understandable. Complex structures are difficult to play with; they often bring changes.
- If there is no confidence in what is happening in the market, it is better not to enter it.
- There is never 100% certainty in the direction of movement. Do not forget about protective stop-loss orders.
