The relationship between central banks and markets is like parent-child communication. If you indulge your child in everything, you can lose control over them. But we really want to calm the child when they have a tantrum! It is precisely this that is now taking place in the financial markets, and the mass media have become provocateurs. The Wall Street Journal and other tabloids began publishing notes about a possible 75 bps increase in the federal funds rate in June, referring to the words of Jerome Powell that the Fed will be more aggressive if it does not receive a signal that inflation is slowing down. And the market ate this idea with guts.
This is evidenced by a sharp increase in the likelihood of an overly large step at the upcoming FOMC meeting. But if you remember under what circumstances the chairman of the Fed made that speech, then the situation changes. Then investors actively discussed a pause in the process of monetary restriction. Stocks rose, Treasury yields and the US dollar fell, which reversed part of the financial tightening. That is, part of the work of the central bank was erased. Powell needed to remind the market that there would be no pause unless inflation slowed down significantly.
Dynamics of the expected Fed rate increase at the June 14–15 meeting
Now the situation is completely different. The fact that the Fed may sit on the sidelines in September, everyone has safely forgotten. At the same time, the acceleration of US inflation to 8.6% in May led to talk about a faster process of tightening monetary policy. The futures market believes in raising the federal funds rate to 4% in 2023 and that at the next three FOMC meetings it will rise by 175 bps, +50, +50, and +75. But not in June to make the biggest step since 1994! What for? Because of a single inflation report?
Expected 2023 Federal Funds Rate Developments
Thus, because of the articles in the media, the market behaves like a capricious child. Will the Fed calm it down? I think the central bank will raise the rate by 50 bps, but not to stop the panic. It just has its own plan, and it intends to act on it. As a result, a pullback may follow both for the S&P 500 and EURUSD.
It is hardly appropriate to talk about breaking the downward trend for the main currency pair, when Europe is preparing to ration gas consumption in the autumn-winter, the ECB has not set out a specific program of action to close spreads on the European debt market, and Britain provokes the EU into a trade war. The euro has too many vulnerabilities to try to resist the US dollar.
EURUSD, Daily chart
EURUSD, Hourly chart
Technically, without the return of EURUSD to the fair value of 1.052–1.077 on the daily chart, there is no need to talk about any serious counterattack of the bulls. A rebound from resistance at 1.052, 1.061 or an update of the June low are reasons for selling. On the hourly time frame, you can try short-term longs on the breakout of the pivot point at 1.0475.