The euro fell to another monthly low in pair with the US dollar, and the British pound again hung with its whole chest on the lower border of the side channel, which it has been since the end of March this year. Yesterday's statements by American politicians, as well as fairly strong data on the labor market, led to the strengthening of the US dollar.
The president of the Federal Reserve Bank of St. Louis, James Bullard, said during an interview that he supports a sharp increase in interest rates. This needs to be done to withstand the highest inflation in four decades. Bullard supported the projected increase of half a percent in May, as well as the beginning of the reduction of the Fed's bloated balance sheet. "I would like the rates to reach 3-3.25% in the second half of this year," Bullard told reporters after a speech at the University of Missouri. "We must act decisively to bring the interest rate to the right level, which will allow us to quickly cope with inflation."
Let me remind you that last month the Fed raised rates by 25 basis points, to a target range of 0.25% to 0.5%. Bullard was the only dissenter in the vote and advocated raising the rate by half a point. At the moment, Fed officials expect to raise rates to 1.9% by the end of the year.
The head of the St. Louis Fed also noted that he did not want to anticipate the May meeting and would consider new data before it began, but it is obvious that during the March meeting he was right when he insisted on a more significant increase in rates. The minutes of the meeting published on Wednesday showed that many officials agreed, but supported a smaller increase only out of caution in light of Russia's special operation in Ukraine. The protocols also showed that one or more increases of half a point at once may be appropriate in the near future.
"It is absolutely clear that we need to raise the rate as soon as possible if we want to prevent a sharp slowdown and recession of the economy in the future, as well as stagflation," Bullard said. Bullard has previously stated that his forecast is the most hawkish in the committee, as his goal is a 3% rate for 2022.
Statements by other Fed representatives - Charles Evans from Chicago and Rafael Bostic from Atlanta - also related to monetary policy, which supported the dollar. Evans, speaking at a conference on employment, said he would advocate changing rates to a neutral level, which, according to Fed officials, is about 2.4%. "This level should be reached by the end of 2022 or the beginning of 2023. A lot of what we're seeing are supply chain issues and they're going to go away soon," Evans said.
The chairman of the Federal Reserve System, Jerome Powell, spoke about the same thing all last year. What did it lead to? To 8.0% inflation already now, not to mention what its peak value will be.
Another Fed official, Bostic, said that he also favored raising rates to a neutral level, but it should be done in a balanced way - by analyzing new data and assessing uncertainty about future economic prospects.
As for the fundamental statistics, which also provided fairly good support to the US dollar yesterday, weekly applications for unemployment benefits fell more than predicted. This indicates that employers are retaining workers in an increasingly tense labor market. According to the Ministry of Labor, initial applications for unemployment benefits fell by 5,000 to 166,000 in the week ended April 2. The level corresponds to the lowest in the last 54 years. The average estimate in the survey of economists is 200,000 applications. The reduction in the number of new applications is another sign of positive dynamics in the labor market. Weekly applications for unemployment benefits have been falling for most of this year after a sharp decline in the number of COVID-19 infections and steady consumer demand.
As for the technical picture of the EURUSD pair
The geopolitical tension around Russia and Ukraine has again grown to a rather serious level, as Kyiv is delaying negotiations. Given the aggressiveness of the Fed's policy, it is best to bet on further strengthening of the dollar. To return the market under their control, euro buyers need a break above 1.0900, which will allow them to build a correction to the highs: 1.0940 and 1.1010. In case of a decline in the trading instrument, buyers will be able to count on support around 1.0850. Its breakdown will quickly push the trading instrument to the lows of 1.0810 and 1.0770.
As for the technical picture of the GBPUSD pair
The pound remains in a wide side channel and for the bulls to continue to grow, they need to think about how to return the resistance to 1.3080. A break in this range will open the way to 1.3105 and then to 1.3140. If the bears achieve a breakdown of 1.3050 - the lower limit of the channel in which the pair has been since the end of March this year, you can safely catch the pound in the areas of 1.3000 and 1.2960.
