FX.co ★ What to expect from Federal Reserve today and how to respond

It goes without saying that Fed policymakers are ready to suspend the cycle of rate hikes in light of yesterday's inflation data. If so, it will be the first pause in monetary tightening over the last 15 months. The question is still open whether they will be poised to tighten policy again next month. The FONC's interest rate decision and forecasts will be released at 2:00 pm EST, followed by a press conference 30 minutes later from Chairman Jerome Powell. Importantly, the rate-setting committee will publish revised forecasts for the near future, which is of particular interest to longer-term investors.

A few weeks ago, Fed Chairman Jerome Powell made it clear that central bank officials would prefer to wait to better evaluate the impact of past rate hikes on the economy. We also need to look at how the recent US bank failures have affected credit conditions: more precisely, how much credit has deteriorated and what consequences this will entail to the economy. However, with inflation still more than double the central bank's target, the FOMC is likely to stress that it is leaving the door open for another rate hike in July or September.

Obviously, the first summer press conference will be one of the most difficult for Chairman Powell in recent times.

As I noted above, yesterday's Labor Department CPI report showed that headline inflation loosened its grip. At the same time, the core CPI which excludes volatile food and energy prices continued its rise that certainly worries Fed officials. And even though the Federal Reserve opened the door, pointing to a pause in June, it will clearly have to confess that their measures have not hit the goal yet.

In terms of forecasts, the central bank has split into more dovish participants who are willing to stick to the FOMC's March forecast of a peak rate of 5.1%, and hawks who want to see a higher ultimate rate of 5.4% or more. Economists expect that the average forecast of policymakers will not change. The committee may also upgrade their economic growth forecast for 2023, predicting a more resilient labor market with lower unemployment this year.

As for the Fed's statements, most likely they will be very similar to those in May. However, it must be made clear to the committee that interest rates are only kept unchanged "for the time being" or "at this meeting", which implies the likelihood of changing them in the future. At the same time, about 40% of economists expect disagreements among the voting policymakers that will enable a gap in voting. Minneapolis Fed President Neil Kashkari, Dallas Fed President Laurie Logan and Governor Christopher Waller, seen as Fed hawks, are likely to oppose the pause. Hawkish votes could reinforce the view that the committee is mulling over more rate hikes this summer. Some market participants expect a further recovery of the euro and pound against the US dollar after the Federal Reserve's meeting. In this context, such statements and disagreements will be the main reason for buying the US dollar against risky assets.

Most likely, Jerome Powell will have to talk about the agenda for the meetings in July and September. He is expected to clear up whether he continues to consider a soft landing as likely for the US economy. If there is no certain answer to all these questions that rates will continue to rise if necessary, the euro and pound sterling will continue to strengthen, especially the pound since the Bank of England has no other options.

The technical picture of EUR/USD suggests that buyers have to defend 1.0768 and grab 1.0800 if they want to maintain control. In this case, they will be able to push the price to 1.0830. From this level, they will climb to 1.0874, but it will difficult without upbeat fundamental statistics on the Eurozone. In case EUR/USD declines, I expect serious moves from large buyers only at around 1.0765. If the buyers lack activity in this area, it makes sense to wait until the low of 1.0730 is updated so that we could open long positions at 1.0700.

As for the technical picture of GBP/USD, the pound sterling is still enjoying strong demand. We can rely on the sterling's growth after the 1.2630 is taken out by the buyers. A breakout of this level will cement hopes for a further recovery to 1.2710. In case the instrument loses ground, the bears will try to seize 1.2580. If successful, a breakout of this level will deal a blow to the bulls' positions and push the price down to the low of 1.2530. Then, the door will be open towards 1.2470.