The euro and the pound sterling dropped after Federal Reserve Chair Jerome Powell hinted on Friday that interest rates would remain high and might increase further if the economy and inflation failed to cool down. However, bulls quickly recovered from monthly lows.
In his long-awaited speech last Friday at the annual US central bank conference in Jackson Hole, Powell emphasized that the Fed's work on combating inflation had not been done yet. However, he highlighted progress in slowing down price growth. He also mentioned that the central bank would act cautiously, maintaining the possibility of keeping rates steady at the meeting in September. Notably, in July, the benchmark rate was increased to a 22-year high. Broadly speaking, Powell's speech showed that policy was shifting towards risk management amid significant uncertainty about the impact of previous hikes and the current trajectory of prices and the labor market.
In other words, Powell said what investors were expecting. It is evident that the Federal Reserve would have long wanted to end this tight cycle, as the banking crisis that erupted earlier this year could flare up again at any moment. Various economists are repeatedly warning us about such a situation. Credit issues have not been resolved yet. In addition, a slowdown and reduction of activity in the US economy, as recent PMI indices have clearly signaled, could weaken confidence that the US will face a rosy future and will be able to avoid a recession next.
On the other hand, the Fed is repeatedly warning that it will not make significant changes until it sees the economic slowdown it desires. Considering the economic resilience observed in the second quarter and still low unemployment, there is nothing surprising in Powell's statements.
Even if the Fed refrains from raising rates in September, policymakers are unlikely to announce the end of tightening anytime soon. Although some Fed officials have different views on further rate hikes, they all express a similar opinion on the need to maintain rates at a high level for an extended period.
"Under-tightening would be a worse mistake than over tightening a little bit because we can course-correct that," Cleveland Fed President Loretta Mester said. "We're going to stay the course in terms of our monetary policy making sure that we are restrictive enough so that inflation comes back down," she added.
Since Powell's speech met expectations, traders had a chance for an upward correction in risky assets.
Regarding today's technical picture for EUR/USD, the pair continues losing value. To regain control, buyers should keep the price above 1.0805. This would pave the way to 1.0835. From there, the price may climb to 1.0875. However, it would be quite difficult without support from major traders. If the pair drops, I expect significant actions from major buyers only around 1.0805 and 1.0770. If they fail to be active, it would be wise to wait for a low of 1.0740 or consider long positions from 1.0705.
Meanwhile, pressure on the pound sterling remains the same. The pound sterling will rise only after bulls gain control over 1.2610. Regaining this range will boost hopes for recovery to 1.2650, after which we can talk about a surge to around 1.2690. If the pair falls, bears will attempt to take control over 1.2580. If they succeed, a breakout of this range will hurt bulls' positions and push GBP/USD to a low of 1.2545, with the potential to drop further to 1.2480.