It takes time to suppress high inflation, and the Federal Reserve will make decisions based on incoming data. This is stated in the accompanying notes that Fed Chairman Jerome Powell will voice in his speech before Congress. Investors will be looking for hints of a federal funds rate hike in 2023 in this speech. However, it seems that not only the text but also the intonation with which it is delivered is important for the market. And EUR/USD is no exception.
Powell believes that borrowing costs will need to rise even further to slow down economic growth in the U.S. below the long-term average level and contain price pressure. The timing of monetary tightening will be determined by incoming data. The Federal Reserve remains firmly committed to bringing inflation down to the 2% target and will make decisions from meeting to meeting. Almost all FOMC members are confident that a federal funds rate hike is necessary to achieve the target. This will cool both the labor market and the economy.
Fed forecasts for the Federal Funds rate
In June, the Federal Reserve paused its process of monetary policy tightening for the first time in 15 months, raising the rate by 500 basis points since the start of the cycle to 5.25%. The futures market predicts a further increase in borrowing costs by 25 basis points in July, with an almost 80% probability. However, CME derivatives do not anticipate a second move, which is reflected in the FOMC forecasts. The chances of a federal funds rate reaching 5.75% by the end of 2023 are estimated at 12%. At the same time, 14 out of 18 Committee members believe in such a scenario.
Essentially, the market is going against the Federal Reserve, which, in the past, has generally ended poorly for it. However, if the central bank makes a mistake or intentionally misjudges, it presents a great opportunity for stock indices, risky assets, and EUR/USD. Investors will closely monitor the conditions that Powell believes are necessary for the continuation of the monetary tightening cycle.
The accompanying notes indicate that, in making decisions, the Federal Reserve will consider the cumulative effect of monetary policy tightening, the time lags with which it affects economic activity and inflation, as well as economic and financial events.
Overall, Powell’s speech before Congress appears balanced. There are no clear signals that the federal funds rate will necessarily rise to 5.75%. Therefore, the activity of “bulls” on EUR/USD ahead of the speech seems logical. However, it should be noted that the Fed Chair will have to answer lawmakers’ questions. And even a hint of a 50 basis points increase in borrowing costs by the end of the year can turn everything upside down.
Technically, the short-term consolidation of EUR/USD suggests calm before the storm. Breaking through the resistance at 1.0945 and 1.0975 are needed to continue the rally. If buyers achieve this, the pair will jump to 1.1 and 1.1045. Sellers will step in there. A drop in the euro below $1.089 will provide a basis for forming shorts.
The material has been provided by InstaForex Company – www.instaforex.com
It takes time to suppress high inflation, and the Federal Reserve will make decisions based on incoming data. This is stated in the accompanying notes that Fed Chairman Jerome Powell will voice in his speech before Congress. Investors will be looking for hints of a federal funds rate hike in 2023 in this speech. However, it seems that not only the text but also the intonation with which it is delivered is important for the market. And EUR/USD is no exception.
Powell believes that borrowing costs will need to rise even further to slow down economic growth in the U.S. below the long-term average level and contain price pressure. The timing of monetary tightening will be determined by incoming data. The Federal Reserve remains firmly committed to bringing inflation down to the 2% target and will make decisions from meeting to meeting. Almost all FOMC members are confident that a federal funds rate hike is necessary to achieve the target. This will cool both the labor market and the economy.
Fed forecasts for the Federal Funds rate
In June, the Federal Reserve paused its process of monetary policy tightening for the first time in 15 months, raising the rate by 500 basis points since the start of the cycle to 5.25%. The futures market predicts a further increase in borrowing costs by 25 basis points in July, with an almost 80% probability. However, CME derivatives do not anticipate a second move, which is reflected in the FOMC forecasts. The chances of a federal funds rate reaching 5.75% by the end of 2023 are estimated at 12%. At the same time, 14 out of 18 Committee members believe in such a scenario.
Essentially, the market is going against the Federal Reserve, which, in the past, has generally ended poorly for it. However, if the central bank makes a mistake or intentionally misjudges, it presents a great opportunity for stock indices, risky assets, and EUR/USD. Investors will closely monitor the conditions that Powell believes are necessary for the continuation of the monetary tightening cycle.
The accompanying notes indicate that, in making decisions, the Federal Reserve will consider the cumulative effect of monetary policy tightening, the time lags with which it affects economic activity and inflation, as well as economic and financial events.
Overall, Powell’s speech before Congress appears balanced. There are no clear signals that the federal funds rate will necessarily rise to 5.75%. Therefore, the activity of “bulls” on EUR/USD ahead of the speech seems logical. However, it should be noted that the Fed Chair will have to answer lawmakers’ questions. And even a hint of a 50 basis points increase in borrowing costs by the end of the year can turn everything upside down.
Technically, the short-term consolidation of EUR/USD suggests calm before the storm. Breaking through the resistance at 1.0945 and 1.0975 are needed to continue the rally. If buyers achieve this, the pair will jump to 1.1 and 1.1045. Sellers will step in there. A drop in the euro below $1.089 will provide a basis for forming shorts.
The material has been provided by InstaForex Company – www.instaforex.com
Related Posts: