FX.co ★ Fed takes a pause in rate hike cycle

Fed pauses interest rate hike cycle

As expected, after 15 months of persistent battle against inflation, the Fed announced a pause in the rate hike cycle. However, risk appetite dipped, which significantly affected the movements of euro and pound.

The drop occurred because the Fed made it clear that rates will increase again at some point in the future. Chairman Jerome Powell said that almost all Fed officials expect it will be appropriate to resume rate hikes in the second half of 2023 to curb inflation. He declined to disclose whether another rate hike could occur as early as July, but emphasized that it would be a highly significant meeting.

ECB decision on interest rates

The ECB appears to be ready to take what could be the penultimate step in its unprecedented campaign of raising interest rates. Economists and traders overwhelmingly expect the deposit rate to be raised by a quarter point to 3.5%, and the key interest rate to rise to 4.00%. However, all eyes will be on the forecast of how many more rate hikes the ECB will pursue, given that inflation still exceeds the 2% target level. Future steps will depend on inflationary pressures and how the economy absorbs current actions. Negative statements about the European economy could lead to massive sell-offs in euro, even in the face of rate hikes.

Bank of England

The Bank of England decided to commission a broad examination of its forecasting actions and related processes, after failing to foresee the scale of the current inflation crisis. Officials publicly stated that they relied on their own judgment because the models they use could be disrupted under particularly unusual conditions.

Rate Cut in China

The People's Bank of China ramped up monetary stimulus in an attempt to revive the economy amid signs of a housing market slowdown, declining business investment, and record youth unemployment. The central bank reduced the loan rate by 10 basis points to 2.65%, marking the first cut since August of last year. This may prompt banks to lower their lending rates as early as next week.

In terms of the forex market, EUR/USD could grow further if buyers defend 1.0780 and reclaim 1.0820. This will allow a move towards 1.0865, heading in the direction of 1.0910. In the case of a decline around 1.0780, euro will fall to 1.0730 and 1.0700.

GBP/USD remains bullish and could continue to grow if buyers gain control above 1.2670. Only a breakdown of this level will trigger a rise towards 1.2710, heading to the level of 1.2760. In the event of a decline in the pair, sellers will attempt to regain control around 1.2620, which could lead to a fall to 1.2570 and 1.2530.