According to new projections from policymakers, rates will hit their highs at 5.1% next year and then fall to 4.1% in 2024, a higher level than previously thought. Powell claims that the size of the rate hike at the next meeting in February 2023 will depend on incoming data - leaving the door open for another move of half a percentage point or a step down to a quarter point. More importantly, Powell spoke out against the Fed changing its policy next year - bearing in mind the fact that rates could be lowered in the second half of 2023. "It will become appropriate to slow the pace of increases as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal," Powell said during the press conference.
Against this backdrop, demand for risky assets waned and stock indices sagged as investors speculated that the Fed would halt rate hikes after the latest inflation data, which continued to decline for the third month in a row. Traders were also betting that borrowing costs would reach around 4.8% in May, followed by a 50 basis point cut in the second half of 2023.
A couple of weeks ago, Powell signaled plans to moderate the pace of rate hikes and delivered on that promise, but one would not expect the Fed to immediately reverse its policy after several declines in the annual rate of inflation. The central bank cut the pace of rate hikes after four consecutive hikes by 75 basis points, the sharpest increase since Paul Volcker led the central bank in the 1980s.
It will take time for the regulator to achieve its goals and it does not intend to retreat from them. Given that the economy has so far coped very well even with such a high cost of borrowing, we do not have to worry about a recession. With the inflation rate going down like that, we can probably avoid a serious problem. Yesterday, Powell made it clear that higher rates would affect the economy. The Fed's growth projections for 2023 were revised up by 0.5%. The 2022 GDP estimate was also raised slightly to 0.5%. As for the unemployment rate, the central bank raised its forecast to 4.6% next year from 3.7% in November.
As the EUR/USD pair, demand for the euro has weakened and now everything will depend on the US retail sales data and the European Central Bank's decision on monetary policy. To continue rising, the euro needs to break above 1.0670, which will spur the trading instrument to break through the new December high at 1.0720. Above this level, it would be easy to climb to 1.0740. In case of a decline in the trading instrument, only a drop below the support of 1.0625 may increase the pressure on the pair and push it to 1.0580, opening the way to the low of 1.0540.
As for the GBP/USD pair, it is moving within the sideways channel. After yesterday's upward spurt, bulls reduced their appetite because of the statements of Jerome Powell and now everything depends on the Bank of England and its decisions. Now bulls need to break through 1.2395 to continue the uptrend. Settling above this level, the price may return to the area of 1.2440. After that, the British pound may soar to the area of 1.2490. The pressure on the trading instrument may return if bears take control over 1.2340. This is likely to push the pound/dollar pair back to 1.2290 and 1.2240.