FX.co ★ Euro is growing despite expectations of a more aggressive Fed policy

Fed Chairman Jerome Powell will speak today and may surprise traders with his statements. Coincidence or not, many Fed representatives casually mentioned a possible aggressive interest rate hike this May, that is, a half-point increase in rates. St. Louis Fed President James Bullard even said a 75 basis point hike could happen.

However, too-high rate risks a recession.

More importantly, Jerome Powell wants to tamp down inflation without causing serious damage to the labor market, which is now back to pre-coronavirus levels. Unemployment is currently at an ultra low level of 3.6%, but Powell is not yet satisfied as there are still more than 1.7 vacancies for every unemployed person. That fuels inflation very much, forcing employers to offer higher wages to new hires, or raise wages to old ones so they don't leave in search of better deals. Inflation, as measured by the Fed's preferred indicator, rose 6.4%, more than three times the Fed's target of 2%.

Today, Powell will make a number of important announcements about monetary policy in preparation of the Fed meeting on May 3-4. Many already criticize the central bank's slow reaction to the persistently rising inflation and potential recession, but Fed members are partly justifying their late action with the unexpected shocks, such as the conflict in Ukraine and another coronavirus outbreak in China. In any case, if the Fed does not hint at a more aggressive increase in interest rates, risk assets will continue to rise. After all, the ECB is also preparing a more aggressive approach on its monetary policy because of high inflation.

According to some members of the ECB governing council, the central bank may raise deposit rates above zero by the end of this year if the Euro area does not experience a serious shock. This is despite the risk the ongoing military operation in Ukraine poses to the eurozone economy.

Technical picture of the EUR/USD pair

Euro continues to rally, thanks to growing expectations that the ECB will be more aggressive in terms of monetary policy. However, worsening geopolitical tensions due to Ukraine's refusal to negotiate will limit the upside potential of risky assets, which could lead to the return of pressure in the markets. If the Fed tightens further its policy, EUR/USD will undoubtedly see a decline.

To return the market under their control, euro buyers need a break above 1.0890, which will allow building a correction to the highs 1.0930 and 1.0970. But if the pair decreases below 1.0810, the quote will quickly slide to 1.0760 and 1.0720.

Technical picture of the GBP/USD pair

A lot depends on 1.3070 because its breakdown will lead to a further rise to 1.3100 and 1.3130. Meanwhile, a decline below 1.3040 will result in a dip to 1.3020 and 1.2990.