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Powell's announcement that rates would increase in March triggered a series of sell-offs in risky assets.
He said the central bank is ready to raise interest rates and take similar steps that could curb high inflation, but clarified that officials have not made any decisions on the final change in policy as the Fed must remain flexible in this direction. In any case, they made the decision because inflation has already surpassed the target of 2% and the labor market has returned to its pre-pandemic levels.
The next step that the Fed will take is to reduce the balance sheet, but the exact timeline is yet to be specified. The balance sheet now stands at nearly $8.9 trillion, more than double its size before the Fed began the emergency bond purchase program. In a separate statement, the Fed said it intends to primarily hold Treasuries over the long term.
Talking about inflation, the rate has skyrocketed to 7%, the highest level since the 1980s. Stocks plunged because of this news, while the yield on 10-year Treasury bonds rose sharply.
Based on Powell's tone at the press conference, it is clear that the Fed will be much more inclined to quickly raise interest rates in the face of high inflation than to ease policy due to labor market difficulties. The earliest time that it could hike is in March, followed by three more increases this year. Critics say the Fed is acting too slowly and is now losing the fight against inflation, but major market indicators say otherwise.
With regards to statistics, indicators hint that the housing market is likely to remain resilient this year. However, higher mortgage rates and significant price increases may dampen sales. The December data for new home sales is up 11.9% m/m, the highest since March 2021. The average price is $377,700.
Today, a report on US 4th quarter GDP will be released, and it is likely that a strong figure will provoke higher demand for dollar. That will continue the bearish trend in risky assets.
Technical analysis for EUR/USD
A continued decline below the 12th figure will provoke sell-offs to 1.1180 and 1.1150, but a consolidation above 1.1240 will return demand for euro and lead to a rise to 1.1270 and 1.1300.
Technical analysis for GBP/USD
A consolidation above 1.3450 will provoke further jumps to 1.3490 and 1.3530, but a dip below 1.3400 will push pound down to 1.3360 and 1.3320.
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