Risk appetite returned after Fed Chairman Jerome Powell hinted that further rate hikes could send the US economy into recession. He said a soft landing is very difficult to achieve because there is a risk that if the Fed fails to restore price stability, inflation will take root in the economy.
However, Powell also revealed that officials see further rate increases appropriate in the current environment as it would help ease some of the worst price pressures in 40 years.
Last week, the Federal Open Market Committee announced a 75 basis point increase in interest rates, the largest since 1994. Immediately after the meeting, Powell told reporters that another 75 bp hike is scheduled next month. But yesterday, when asked if the Fed will continue to act aggressively, the Fed chief avoided answering specifically, which put pressure on dollar. This provided support to the stock markets and returned demand for risky assets. Nevertheless, Powell stressed that the Fed is not trying to provoke a recession, since worsening economic conditions are not part of the tasks of the central bank. And although they really do not see the chance of a recession as particularly high right now, the Fed acknowledges that it is possible, as recent events have made it difficult for the central bank to cut inflation while maintaining a strong labor market. Powell reiterated that a soft landing is the Fed's goal, but doing so is extremely difficult right now given the military sting operation, commodity prices and further supply chain problems.
Investors expect the US central bank to continue raising rates to around 3.6% by the middle of next year. This is because CPI rose 8.6% last month, the highest in four decades. The University of Michigan also reported that US households expect inflation to be 3.3% over the next 5-10 years.
Other countries are also experiencing serious problems with inflation. For instance, the Office for National Statistics reported that UK CPI accelerated to 9.1% last month, from 9% in April. Retail prices also rose more than expected, soaring up to 11.7%.
Talking about the forex market, euro bounced impressively yesterday, but a correction will occur only after an obvious return and consolidation above 1.0600. That will certainly prompt a move towards 1.0640 and 1.0680. But in the event of a decline, it is very important for bulls to remain active around 1.0555, otherwise, the quote will fall to 1.0510, 1.0470 and 1.0430.
In terms of pound, there is a price increase, but the uptrend will resume only after a consolidation above 1.2320. That will provoke a rise to 1.2365 and 1.2400, where buyers will face much more difficulties. A larger upward spurt will bring pound to 1.2460. But if the bears break below 1.2230, the quote will fall to 1.2165, 1.2100 and 1.2030.