Federal Reserve Chairman Jerome Powell stated yesterday that economic data for the second quarter has given policymakers more confidence that inflation will soon reach the central bank's 2% target, which could pave the way for interest rate cuts in the short term.
Powell noted the progress of recent inflation figures but made it clear that he is not prepared to make any specific promises about the timing of rate cuts. The Fed Chairman also reminded us of the potential risks to the labor market that have emerged due to the Fed's efforts to curb prices, but for now, he is not willing to take any action on this.
All of this was interpreted by traders as a more cautious and hawkish approach despite the progress in inflation, leading to increased demand for the US dollar.
"We haven't gained any additional confidence that inflation is decreasing and were disappointed with the data in the first quarter. But three indicators in the second quarter, including last week's figure, do indeed add confidence," Powell said in an interview on Monday. "Now that inflation has decreased, and the labor market has cooled, we will gradually move towards policy easing," Powell said.
I would like to remind you that the Fed has kept borrowing costs at their highest level in the last two decades for about a year now as the central bank strives to bring inflation down to the 2% target. Officials want even greater deceleration in price growth without causing undue harm to the labor market, which has held up well under high borrowing costs, allowing rates to remain high without issues. Now, with two months of rising unemployment in the US, discussions about rate cuts have gained much more weight, which has been the reason for the sharp rise in risky assets observed recently.
In the interview, Powell described the labor market as gradually cooling compared to the beginning of the recovery from the COVID-19 pandemic and said that an unexpected weakening could prompt a reaction from the Fed.
I would like to remind you that the next Federal Open Market Committee meeting will be held on July 30-31, where the Fed is expected to keep interest rates unchanged. Traders are betting on at least two cuts by the end of 2024, starting in September.
Yesterday, San Francisco Fed President Mary Daly also stated that some adjustment in interest rates is likely justified. Daly previously warned that the labor market is approaching a tipping point where further deceleration could lead to higher unemployment. Chicago Fed President Austan Goolsbee noted last week that recent inflation data indicates it is on track to 2%.
Regarding the current technical picture for EUR/USD, buyers need to focus on reclaiming the 1.0920 level. Only this will allow targeting a test of 1.0940. From there, it could climb to 1.0960, but doing so without support from major players will be quite challenging. The furthest target will be the maximum at 1.0980. In case of a decline in the trading instrument, I expect significant actions from major buyers only around the 1.0885 area. If there are no buyers there, it would be prudent to wait for the update of the minimum at 1.0865 or to open long positions from 1.0840.
As for the current technical picture for GBP/USD, pound buyers need to reclaim the nearest resistance at 1.2990. Only this will allow targeting 1.3020, above which it will be quite difficult to break through. The furthest target will be the 1.3060 area, after which a more sharp upward move of the pound to 1.3090 could be considered. In case of a decline, bears will try to take control over 1.2960. If they succeed, breaking the range will deal a serious blow to the bulls' positions and push GBP/USD to the minimum at 1.2930, with the prospect of dropping to 1.2900.
