02.05.202414:39 Forex Analysis & Reviews: Fed makes tough decision

The complexity of the situation when the economy is losing growth and inflation is rising, which is called stagflation, forced the Federal Reserve to act extremely cautiously yesterday. At the end of the meeting, the rates were left unchanged at 5.5%, which was generally expected by the market. That said, it did come as a surprise that Federal Reserve Chairman Jerome Powell maintained his hopes for lower interest rates this year while acknowledging that a surge in inflation had reduced policymakers' confidence that price pressures were easing.

Powell, speaking to reporters on Wednesday after the Fed's meeting, said rising prices were likely to continue to slow the economy this year. Powell's remarks apparently reflected a broader shift in the Fed's plans to keep borrowing costs high for longer. The change in sentiment within the Fed was the culmination of several months of solid gains in inflation, hiring, and consumer spending. This also forced investors to cut their expectations for a rate cut from about six to one this year.

"I can just say that when we get that confidence, then rate cuts will be in scope. And I don't know exactly when that will be," the Fed chair said.

Policymakers kept rates unchanged within the 5.25%–5.5% range. Recently, Powell stated that it would probably be appropriate to start cutting rates at some point this year.

However, it is worth noting that the risks of a rate hike have also been ruled out. The Fed chief set new conditions for further rate hikes, saying it was unlikely that tightening would be the next policy move. Officials will need to see convincing evidence that policy is not restrictive enough to bring inflation back to the 2% target.

Powell's comments calmed the fears of investors worried that the central bank chief would be more vocal in opposing a rate cut this year or even announce a potential increase. Treasury yields fell and stocks rose briefly during the press conference, which was especially notable after Powell said a rate hike was "unlikely."

Risk assets in the currency market reacted similarly. After a small drop, demand for the euro and the British pound returned. However, the currencies failed to leave the channels, where they are currently trading.

As for the current technical picture of EUR/USD, the euro is once again experiencing problems. Now, buyers need to think about how to reach the level of 1.0750. Only this will allow them to test 1.0780. From there, it is possible to climb to 1.0805, but it will be quite difficult without support from big players. The furthest target will be the high of 1.0830. If the trading instrument declines, I expect any serious action from big buyers at only around 1.0700. Otherwise, it would be good to wait for an update of the 1.0650 low or open long positions from 1.0600.

Meanwhile, buyers of the pound sterling have much more problems than yesterday. Bulls need to take the nearest resistance at 1.2565. This will allow them to target 1.2610, above which it will be quite problematic to break through. The furthest target is seen at 1.2655, after which it will be possible to talk about a sharper rush to 1.2700. If the pair falls, bears will try to take control of 1.2520. If they succeed, a breakdown of the range will deal a serious blow to bulls' positions and push GBP/USD to the low of 1.2485 with the prospect of reaching 1.2450.