05.08.202600:53 Forex Analysis & Reviews: Is the Fed Actually Going to Raise Rates?

The Federal Reserve is waiting for inflation to slow down. At least, that's what John Williams, the President of the New York Fed, stated. Williams has never been part of the "hawkish" wing and did not vote for a rate hike at the last meeting, where, let me remind you, three voting FOMC members voted "in favor." In Williams' view, the current level of interest rates is adequate to maintain the disinflation process in the long term. It is useful to interpret Williams' words as follows: "We expect the conflict in the Middle East to end, leading to a drop in oil prices, which will naturally slow down inflation." Or: "We do not intend to raise the interest rate, but we want to find a suitable explanation for this decision."

In my opinion, it is currently impossible to forecast the inflation rate even a month ahead. Let's assume the conflict in the Middle East really does come to an end (though it is impossible to understand when and how). But what if it does not? What if a blockade of the Bab-el-Mandeb Strait accompanies the blockade of the Strait of Hormuz? In this case, oil prices could easily exceed $150 per barrel, and there would be no discussion of slowing inflation at all. Therefore, in my view, Williams' words are an attempt to justify the reluctance to raise rates. The European Central Bank is tightening policy even with inflation much lower.

Nevertheless, we cannot regard the statements of one of the Fed's governors lightly. If one of the FOMC members takes a sufficiently tough and uncompromising stance, other governors may share this view as well. Recall that this Friday, data on U.S. unemployment and the labor market will be released, which could give Kevin Warsh and the company a legitimate reason not to tighten monetary policy. If the U.S. labor market continues to "cool," it is unlikely that the key rate will be raised, as this would further slow down the economy and cool the labor market even more.

My opinion remains the same. The Fed is not going to tighten monetary policy and will seek any reason to avoid raising interest rates. It will forecast slowing inflation by 2028, citing the "cooling" of the labor market or changes in the methodology used to determine inflation. For example, Warsh recently stated that the core Personal Consumption Expenditures (PCE) index is slowing. However, on a year-on-year basis, it remains at the same level as regular inflation. The market has already priced in the most "hawkish" scenario...

Wave Analysis of EUR/USD:

Based on the conducted analysis of EUR/USD, I conclude that the instrument remains within the upward portion of the trend (bottom image), while in the shorter term, it is in the downward portion of the trend. In my opinion, this is a good time to try to form long positions. However, the instrument may still drop to the 13th figure within wave 5 in C. Wave analysis often presents surprises, so I would currently be adjusting to buy.

Wave Analysis of GBP/USD:

The wave picture for the GBP/USD instrument has become quite complex. Currently, the instrument has built three waves down, while for EUR/USD, five waves may be constructed. Consequently, the anticipated wave 2 may take on a more complex and extended form if EUR/USD builds a convincing wave 5 in C. Alternatively, the wave interpretation may take on a different appearance than it currently has. For the British pound and the euro, I am bullish in the medium term. If we abstract from the wave analysis of the euro, I would say that the pound has begun to build a new upward wave structure.

Main Principles of My Analysis:

1. Wave structures should be simple and understandable. Complex structures are difficult to play; they often carry changes.
2. If there is no confidence in what is happening in the market, it is better not to enter.
3. There can never be 100% certainty in the direction of movement. Don't forget about protective stop-loss orders.
4. Wave analysis can be combined with other types of analysis and trading strategies.