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The recent statement of the Fed representatives brought demand back to the dollar. Tense geopolitical situation also decreased risk appetite, especially since the global economy is already slowing down due to excessively high inflation.
On Wednesday, San Francisco Fed President Mary Daly said a 50 basis point rate hike may be seen at the monetary policy meeting in May, as well as a cut in the balance sheet, which can be justified depending on economic data in the coming weeks. "If we need to raise the rate by 50 points at once, we will do it," Daly said. She added that she is more supportive of a 25 basis point increase for now, but is ready to do everything possible to ensure price stability.
As such, most investors already shifted their expected rate hikes to a percentage point at the Fed meeting on May 3-4. It followed Fed Chairman Jerome Powell's statement that the central bank is ready to take a more aggressive step if necessary.
Daly also warned against acting too quickly, given the global risks to the economy right now. There is a chance that the US economy could go into recession if the geopolitical situation worsens and inflation continues to skyrocket. "I don't think it's appropriate for us right now. The pace of policy tightening is rapidly gaining momentum, and we are increasingly dependent on incoming data, while forgetting about the risks," she said.
As noted above, the Fed is likely to cut its balance sheet by around $9 trillion during the meeting in May. That could lead to another rate hike, especially since other central banks are tightening their policies as well. "It is likely that some increase in the key interest rate above the neutral level will be required. Most likely, this will happen in 2023," Daly said.
Loretta Mester, President of the Federal Reserve Bank of Cleveland, has the same view and said that she supports a more aggressive rate hike this year, including a half-percentage hike because that could help curb the highest inflation in four decades. She said it is better to do it sooner rather than later.
Despite all these statements, the market reacted quite calmly. Stock indices corrected after almost a week-long rally, and the US dollar slightly won back the losses against euro and pound, observed the day before.
Technical analysis for EUR/USD
Geopolitical tensions around Ukraine remain quite high, and the prospects for further strengthening of risky assets are gradually fading away. Given the aggressiveness of the Fed's policy, it is best to bet on the further strengthening of dollar. This means that euro buyers need a return above 1.1010 for EUR/USD to rise to 1.1050 and 1.1090. Further decline of the pair will be met by active purchases around 1.0970, a breakdown of which will quickly push the quote to 1.0930 and 1.0890.
Technical analysis for GBP/USD
To continue the growth of pound, bulls need to overcome 1.3210 and protect 1.3170. In the event that this level is broken, the next major support will be seen in 1.3120 and 1.3080. The bull market will continue only after the breakdown of 1.3210 because that is the only thing that would prompt the pair to rise to 1.3250 and 1.3290.
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