The U.S. dollar strengthened against the euro, the pound, and other risk assets after several representatives of the U.S. Federal Reserve stated on Thursday that they are ready to pause interest rate cuts at the upcoming meeting, citing stabilization in the labor market and persistent inflationary pressure.
Traders and investors interpreted these comments as confirmation of the regulator's determination to fight inflation, even if it leads to slower economic growth. The rise in U.S. Treasury yields that followed the statements only increased the attractiveness of the dollar as a safe-haven asset.
Amid the stronger dollar, the euro and the British pound came under pressure. The European economy, facing its own set of problems, looks less resilient compared to the U.S. economy. The pound, in turn, is suffering from uncertainty surrounding future economic growth and inflation trends.
As many as five presidents of regional Federal Reserve Banks—who in recent months have found themselves on opposite sides of the political spectrum—stated that the U.S. central bank now has every opportunity to wait for additional data before taking any further action. It is widely expected that the Fed will leave its key interest rate unchanged at the January 27–28 meeting.
These comments followed reports last week indicating that the unemployment rate fell to 4.4% in December, halting the string of increases seen in previous months, as well as inflation data showing that annual figures are not demonstrating the necessary slowdown. Moreover, the Fed's preferred inflation measure may even be close to 3%, a full percentage point above the target level.
"The most important thing we need to do is bring inflation back to 2%," Chicago Fed President Austan Goolsbee said in an interview on Thursday, citing concerns among businesses across his district about rising prices and declining housing affordability. The head of the Chicago Fed added that he has set aside previous concerns about the labor market, noting that uncertainty has prompted businesses to slow hiring rather than carry out large-scale layoffs.
Goolsbee, like his Kansas City counterpart Jeff Schmid, expressed outright disagreement with the rate cut at the Fed's December meeting. Speaking at an event on Thursday, Schmid again argued against further rate cuts, asserting that some slowdown in labor market growth is likely necessary to prevent a deterioration in the inflation outlook.
At present, according to futures market forecasts, investors do not expect an interest rate cut in the first half of this year.
Some Fed officials who supported the recent rate cut also spoke in favor of a pause in their comments on Thursday. Among them were San Francisco Fed President Mary Daly, who said policy is in a good place, and Philadelphia Fed President Anna Paulson, who noted that she considers it acceptable to keep rates unchanged this month.
As for the current technical picture of EUR/USD, buyers now need to think about taking the 1.1625 level. Only this would allow them to target a test of 1.1650. From there, the pair could climb to 1.1680, but doing so without support from major players would be quite difficult. The furthest target would be the high at 1.1710. In the event of a decline in the trading instrument, I expect serious action from large buyers only around the 1.1600 level. If no buyers appear there, it would be advisable either to wait for a retest of the 1.1560 low or to open long positions from 1.1530.
Regarding the current technical picture of GBP/USD, pound buyers need to take the nearest resistance at 1.3395. Only this would allow them to target 1.3420, above which breaking through would be quite difficult. The furthest target would be the 1.3440 level. In the event of a decline, bears will attempt to take control of 1.3365. If they succeed, a break of this range would deal a serious blow to bullish positions and push GBP/USD toward the low at 1.3340, with the prospect of moving on to 1.3310.
