Forex Analysis & Reviews: 26.06.2024 - The Fed's tough stance is...

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26.06.2024 12:22 PM

The Fed's tough stance is driving risky assets into a hole

The euro continues to decline, and this is not surprising, especially after the repeated comments about the ultra-easy policy from European Central Bank officials and the tough stance from Federal Reserve officials in the United States.

Yesterday, Federal Reserve Governor Lisa D. Cook stated that it would be appropriate to lower interest rates at some point this year, adding that she expects gradual improvement in inflation in the second half of the year before more rapid progress occurs in 2025. "With substantial progress on inflation and gradual cooling of the labor market, it will be appropriate at some point to lower the level of policy restraints to maintain economic health," Cook said in a prepared speech to the Economic Club of New York on Tuesday. "The timing of any such adjustment will depend on economic data and their impact on economic prospects and risk balance," she said.

Just a reminder: earlier this month, the US central bank left the key interest rate unchanged at its highest level in the last twenty years, which they have maintained for almost a year now. Policymakers say they need to see more data to ensure that inflation is on a stable path towards the 2% target.

Cook expects that the three- and six-month inflation rates will continue to decline, but this decline will occur along a rather bumpy path. Monthly data by the end of the year will also manage to return to a deflationary path, but annual inflation will move towards a smoother decline. "Moreover, I see that next year inflation will slow down even more: inflation in housing and utilities will decrease, reflecting the previous slowdown in rent, as will goods inflation, which will remain negative. Problematic inflation in the services sector, excluding housing, will also normalize over time," Cook said.

According to the Federal Reserve representative, the current monetary policy is restrictive in nature, and there is no need to adjust it. However, even under these conditions, the economy remains stable, and the labor market is strong. Cook believes that the rising levels of delinquencies on mortgage payments do not currently pose a concern for the economy as a whole, but this indicator should now be monitored more closely.

"The labor market is approximately at the same level as it was before the pandemic," she added, describing it as "tight but not overheated." According to her, data indicates that wage growth was inflated last year and may remain similar this year. Cook also mentioned that she and other policymakers are attentive to the risk that the labor market could change very quickly, requiring swift reactions from officials.

As I mentioned earlier, against this backdrop, it is not surprising that demand for the US dollar persists while risky assets are experiencing difficulties.

Regarding the current technical outlook for EUR/USD, buyers should now consider how to reach the level of 1.0730. Only this will allow aiming for a test of 1.0760. From there, climbing to 1.0790 is possible, but doing so without support from major players will be quite problematic. The ultimate target is at 1.0820. If the trading instrument declines only to around 1.0700, I expect significant action from large buyers. If no one steps in, it would be wise to wait for a drop to update to 1.0670 or open long positions from 1.0640.

As for the current technical picture of GBP/USD, pound buyers need to break the nearest resistance at 1.2700. Only then can they aim for 1.2735, above which further breakthrough will be quite problematic. The ultimate target is in the area of 1.2760, after which there could be talk of a sharper upward surge towards 1.2780. In case of a decline, bears will attempt to take control below 1.2670. If successful, breaking this range will significantly impact bullish positions, pushing GBP/USD towards a minimum of 1.2645 with the potential to reach 1.2620.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.