FX.co ★ Key risk flagged by Barkin

Richmond Fed President Tom Barkin made clear yesterday that the Fed sees no reason to change course: the US economy remains resilient, and inflation is still too high. "The appropriate direction of monetary policy is relatively straightforward," he said, while adding that policy should be pursued cautiously. Recall that on November 5, he confirmed support for a gradual pace of interest rate hikes without naming a terminal rate. Now, rhetoric is more definitive. The policy range remains 3.75–4.00%, and the market prices in a December 9 hike at nearly 80% probability, with another move possible in March.

Barkin said the foundation of resilience is corporate profits. In the second quarter, the median S&P 500 company's profits rose by 15%, aggregate profits were up 31%, and the third quarter is tracking similarly. That strength was fueled by explosive gains in the tech sector, unexpectedly strong demand, productivity gains, restrained wages, tax changes, tariff rollbacks, and the use of cheap inventories. Large firms have benefited; small businesses, Barkin notes, are noticeably worse off.

Strong corporate balance sheets continue to support spending and employment. Business investment rose by 12.7% in Q3 and is not solely driven by AI-infrastructure builds. Firms are not hiring aggressively, but they are not laying people off either. Initial jobless claims are at multi-decade lows, and the unemployment rate fell to 4.1% in October from 4.2% in September.

The main problem is broad-based rising costs. Barkin listed health insurance, gasoline and diesel, freight by truck and ship, business travel, memory chips, interest rates, and tariffs. Some firms delayed passing costs through to prices, expecting the Middle East conflict to be short-lived, which explains relatively soft early-summer data. Now, businesses say they are shifting accumulated costs onto customers and meeting less resistance than before the pandemic. Let me remind you that inflation has exceeded the 2% target for more than five years. The PCE price index for September was 3.6% headline and 3.1% core, with monthly gains the fastest since March.

Consumers, Barkin observed, are gloomy but continue to spend. The Michigan sentiment index has hit record lows five times this year, though it rose to 51.0 in November from 48.0 (consensus 48.0), and one-year inflation expectations fell to 4.3% from 4.7%. Real incomes are barely rising; wages increased by 3.1% y/y versus a 2.9% forecast, yet nominal core spending over six months rose by 6.9% y/y. Households are switching to private-label goods, substituting cheaper meats for beef, repairing instead of replacing, dropping insurance coverages, and drawing down savings. Barkin called this "borrowing from the future," and warned that weaker households will bear the cost of that model.

Wealthier Americans are sustaining demand from the other side. They have benefited from higher equity and housing values and account for a disproportionate share of spending. Michigan data shows that over 40% of high-income consumers plan to spend as usual even on goods with strong price increases, more than twice the share of lower-income consumers.

Barkin's most serious risk is AI, which cuts both ways. If returns disappoint, business investment will slow, followed by equities and high-income consumer spending. If AI outperforms and displaces more workers than expected, spending will also fall. In both scenarios, the focus would shift from inflation to the Fed's other mandate—maximum employment. That is why caution is warranted.

The next test arrives today: US inflation data for October, with prior prints at 3.7% y/y headline and 2.6% core. I view Barkin's comments as supportive of a 25-bp hike on December 9 rather than a larger step, and as dollar-positive while the gap with the ECB's 2.50% deposit rate remains around 1.25–1.50 percentage points. If inflation prints above expectations, I don't rule out the market seriously pricing in a March hike as well, which would increase downside pressure on the euro and the pound. A softer report would likely pare some dollar gains but probably wouldn't alter the broader path for interest rates.

As for EUR/USD technicals, buyers need to capture 1.1245. Only that would open a test of 1.1270, from which a push to 1.1300 is possible, though doing so without large-player support will be difficult. On a pullback, I expect increased buying activity only near 1.1215. If that level lacks bids, it would be wise to wait for a decline to a fresh low at 1.1185 or to open long positions at 1.1165.

Regarding GBP/USD technicals, pound buyers need to take the immediate resistance level of 1.3460. That would enable a move toward 1.3481, above which further gains would be challenging. The next upside target is 1.3501. On a decline, bears will try to seize 1.3430. If successful, a range break would deal a heavy blow to bulls, pushing the pound sterling toward a low of 1.3399, with a prospect of extending weakness toward 1.3370.