27.03.202610:54 Forex Analysis & Reviews: High inflation risks and Trump's tariff policy put heavy pressure on Federal Reserve

Federal Reserve official Michael Barr said the regulator has every reason to keep interest rates at current levels. According to him, the conflict in the Middle East, together with other uncertain factors, significantly complicates the Fed's ability to achieve its 2% inflation target. His remarks underline the growing complexity of the macroeconomic landscape the Fed must navigate when shaping monetary policy during the US?Iran war.

A major geopolitical factor such as the escalation in the Middle East inevitably affects global economic processes. In particular, it can push rates higher because of the sharp increase in energy prices we are now seeing. As Michael Barr indicated, rate decisions will be taken with regard to the full set of economic data and geopolitical risks. The high probability that the funds rate will be kept on hold in the near term also reflects the Fed's cautious approach to managing the economy amid heightened uncertainty.

Michael Barr also noted the inflationary risks from Trump's tariff policies, which could persist even after the Middle East conflict ends. He pointed out that services inflation, excluding housing and core inflation measures (which strip out volatile categories such as food and energy), is already at elevated levels.

"Given the significant uncertainty about the potential impact of events in the Middle East on our economy, and the other factors I mentioned, it makes sense to take some time to assess the situation," Barr said on Thursday in prepared remarks to the Brookings Institution in Washington. "Our current policy allows us to maintain stability while we evaluate incoming data, the changing outlook and the balance of risks."

Recall that last week the Federal Reserve left the policy rate unchanged for the second consecutive meeting — a decision Barr said he supported. Fed officials cited increased uncertainty about the economic outlook, in part due to the US?Israel war with Iran, which has driven a sharp rise in oil prices.

At the same time, Barr said the relatively low and stable unemployment rate reflects a balance between job creation and labor force reductions. "However, the low pace of hiring probably leaves the labor market vulnerable to shocks, so vigilance on labor market conditions is required," he added.

Technical outlook for EUR/USD

Buyers need to reclaim 1.1550. Only that will allow a test of 1.1585. From there the pair could reach 1.1630, but doing so without support from major players will be difficult. The more distant upside target is 1.1665. On the downside, I expect significant buyer interest only around 1.1520. If there is no buying there, it would be prudent to wait for a new low at 1.1485 or to open long positions from 1.1440.

Technical outlook for GBP/USD

Pound buyers should take the nearest resistance at 1.3340. Only that would allow targeting 1.3365, above which a further breakout will be difficult. The more distant upside target is around 1.3395. On the downside, bears will try to seize control at 1.3310. If they succeed, a break of that range would deal a heavy blow to bulls and could push GBP/USD down to 1.3285 with the potential to extend to 1.3258.