FX.co ★ Federal Reserve encounters troubles

The fact that the US dollar reacts vigorously to any inflation-related news is no longer surprising for market participants. The market has shifted focus from the scenario of how many times the Federal Reserve should cut interest rates this year to whether it should cut them at all.

Fed policymakers are expected to keep interest rates unchanged at their highs this Wednesday. However, much attention will be paid to any change in rhetoric following the meeting and Chairman Jerome Powell's press conference. Officials are also expected to announce that the Fed's $7.4 trillion balance sheet will be reduced at a slower pace in the near term, a move that is independent of the path to interest rates.

More recently, a lot of policymakers have expressed the need for a cautious approach to further policy moves, hoping to avoid market turmoil. After inflation reports for the first three months of this year were hotter than anticipated, Jerome Powell said it would likely take longer to tame inflation. Clearly, the Fed now needs much more evidence that inflation has been returning to the central bank's 2% target, which would force the central bank to keep interest rates high as long as necessary.

Although Fed officials have proposed delaying rate cuts, it is starting to look like a real possibility that policymakers will not cut interest rates at all this year. Most likely, if inflation does not return to normal in the short term and show a decline from the second quarter, interest rates will be out on hold at elevated levels and the timing of rate cuts will shift towards uncertainty. Although the US economy was losing steam and inflation was accelerating in Q1 2024, the rate-setting committee considers such headwinds temporary. There is hardly anyone left who believes that stagflationary risks will resolve themselves.

At present, almost all members of the Federal Open Market Committee do not see the need to cut interest rates at all this year. Governor Michelle Bowman recently said she admits the risk of rising inflation. Minneapolis Fed President Neel Kashkari suggested there would be no rate cuts this year. Atlanta Fed President Raphael Bostic meanwhile, said he may choose to raise interest rates if inflation continues its acceleration.

Futures market traders now predict just one rate cut this year, well below the 1.5 point cut they expected at the start of the year. The FOMC also talked about those declines this year at its March meeting.

Fed officials will not update their quarterly interest rate forecasts at this week's meeting. However, the latest inflation data will remain a focus of discussion and the committee may reword its policy statement after the meeting to reflect heightened concerns.

Meanwhile, headline inflation in the US remains too high and stubborn.

Regarding the current technical picture of EUR/USD, after the recent growth, the euro is again going through problems. Now buyers need to think about how to take the level of 1.0750. Only this will allow you to test 1.0780. From there the price can climb to 1.0800, but without support from major players it will be quite problematic. The farthest target will be a high of 1.0830. If the trading instrument declines, I expect some serious actions from large buyers only in the area of 1.0715. If there is no one there, it would be a good idea to wait for the low at 1.0680 to update, or open long positions from 1.0640.

As for the current technical picture of GBP/USD, pound buyers fewer problems today than yesterday. The bulls need to take the nearest resistance at 1.2570. This will allow them to aim for 1.2620, but it will be problematic to break through this target. The farthest target will be the area of 1.2660, after which we can talk about a sharper surge of GBP/USD to 1.2705. If the instrument falls, the bears will try to take control of 1.2510. If this can be done, a breakout of the range will deal a serious blow to the positions of the bulls and push GBP/USD to the low of 1.2450 with the prospect of falling to 1.2380.