Fed's restrained policy is weighing down on EURUSD

22 February 2024 62
Fed's restrained policy is weighing down on EURUSD

Minutes from the latest Fed meeting indicate that most officials are still more concerned about the risk of cutting interest rates too early than keeping them at high levels for too long, even if it harms the economy.

Wednesday's summary of the Federal Open Market Committee's meeting from January 30–31 showed that policymakers are seeking more evidence that inflation is moving steadily towards the 2% target before cutting interest rates. In general, the minutes reinforced expectations that borrowing costs will remain high for the foreseeable future.

Fed officials agreed that interest rates have probably peaked, but the exact date of the first rate cut remained unclear. Most Fed representatives expressed concern about cutting interest rates too quickly, indicating that such risks outweigh keeping borrowing costs high for too long. Market participants highlighted the uncertainty about how long monetary policy will remain tight.

The economic data was generally stronger than most forecasters had expected since the central bank's last meeting, reversing the rapid slowdown in inflation seen at the end of 2023 and reaffirming the Fed's cautious approach.

Earlier this month, Powell said it was unlikely officials would reach that level of confidence to begin policy easing at the time of the central bank's March meeting. Prior to that, Fed member Michelle Bowman said on Wednesday that the current time is not suitable to cut interest rates.

Speaking at a separate event on Wednesday, Richmond Fed President Thomas Barkin said the latest economic data showed that price pressures in some sectors are still too strong despite improvements in the overall inflation outlook.

US employers increased the number of jobs over the past year and the consumer price index rose more than expected. Economists predict that the Fed's preferred inflation gauge will show a high growth rate from early 2023. The CPI will be released next week.

As a result, markets have significantly lowered expectations of earlier and quicker rate cuts, and traders in the fed funds futures market are now betting that the Fed will not cut rates until June, thus putting downward pressure on EURUSD.

From a technical point of view, as well as in terms of the formed divergence, the EURUSD currency pair is likely to decline to the level of 1.0720, which the pair has repeatedly tried to break.

The overall recommendation is to sell EURUSD.

Profits should be taken at the level of 1.0720. A Stop-loss could be set at the level of 1.0930.

This content is for informational purposes only and is not intended to be investing advice.

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