The euro and pound sterling have resumed their upward trend following Federal Reserve Chair Jerome Powell's remarks in the US Congress. The Fed chair reaffirmed his previous statements and emphasized that future interest rate hikes were likely but would depend on incoming data.
Speaking a week after the Federal Open Market Committee (FOMC) decided not to raise rates for the first time in over a year, the head of the US central bank clarified that it was only a brief pause and not a sign of the Fed ending its fight against high inflation. Powell stated that nearly all FOMC participants thought it would be appropriate to raise interest rates a few more times by the end of 2023. His remarks were made as part of the semiannual testimony before the House Committee on Financial Services.
After the FOMC's two-day policy meeting last week, officials stated that they anticipate interest rates to rise by 0.5 percentage points by the end of 2023. This implies two additional 25 basis point hikes. Currently, the key interest rate ranges from 5% to 5.25%.
Regarding inflation, Powell acknowledged that it has decreased but remains significantly above the Fed's target level of 2%. "Inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go," Powell said.
Generally, core inflation, which excludes food and energy prices, is considered by Fed officials when making policy decisions. Currently, core CPI stands at 5.3%, well above the target level.
Regarding the labor market, Powell noted that it remains tight, albeit showing some signs of easing. However, the number of job openings still surpasses the available labor force. "We have been seeing the effects of our policy tightening on demand in the most interest rate–sensitive sectors of the economy. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation," the Fed chairman noted.
Jerome Powell also emphasized that reducing inflation would require a period of below-trend growth and added that rate decisions would be based on incoming data and would be made meeting by meeting rather than following a predetermined path.
Regarding the banking sector crisis of March 2023, Powell stated that the incident highlighted the importance of ensuring the appropriate rules and supervisory practices for banks.
The Fed chairman's rather standard speech has reignited demand for risk assets, resuming the bull market for the euro and the pound sterling.
On the technical side, EUR/USD bulls need to push above 1.1000 to maintain control. This would pave the way to 1.1030, and from there, reaching 1.1060 becomes possible. However, without favorable data from the Eurozone, achieving this would be quite challenging. If the pair declines, I expect significant bullish action only around 1.0960. If no substantial activity is observed, the best course of action would be waiting for the pair to hit the low of 1.0910 or consider opening long positions around 1.0860.
Demand for the pound sterling remains intact. A potential rise in GBP/USD can be expected after a breakout above the 1.2780 level. This will make further recovery towards 1.2830 and 1.2880 more likely, allowing for a more pronounced upward surge towards 1.2920. If the pair declines, bears will attempt to gain control around 1.2720. If they succeed and the pair breaks below that level, it would deal a blow to bullish positions and push GBP/USD towards a low of 1.2670, with the prospect of reaching 1.2630.