24.05.202210:26 Forex Analysis & Reviews: Impact of labour market, supply chain problems and Russian aggression on high inflation

Some US politicians believe that the labor market, supply chain problems and Russian aggression are the main drivers of high inflation in the US. Numerous Federal Reserve officials in the last few days have started to discuss that the US interest rate hiking cycle could be interrupted as early as autumn this year.

Federal Reserve Bank of Kansas City President Esther George said she expects the central bank to raise interest rates to 2% by August this year, with further tightening dependent on inflation. "Fed policymakers have emphasized a commitment to act expeditiously to restore price stability, and I expect that further rate increases could put the federal funds rate in the neighborhood of 2% by August, a significant pace of change in policy settings" George said in remarks prepared for delivery to an agricultural symposium. "Evidence that inflation is clearly decelerating will inform judgments about further tightening," she added.

The reaction of risky asset buyers came rather quickly. For example, the Euro settled at the resistance level of 1.0700. A breakout is needed to continue the rally. This would lead to a new sharp surge to 1.0740 and 1.0780. Given the overbought nature of the trading instrument on the shorter term timeframes, the bulls will face some serious problems there again. If there is pressure on the Euro, the bulls will obviously try their best to defend 1.0650. If it is missed, the bears are likely to drop the trading instrument to lows of 1.0600 and 1.0560.

Notably, the Fed raised interest rates by 50 basis points this month, to a target range of 0.75%-1%. Jerome Powell has signaled that the central bank will raise rates over the next two Fed meetings, in June and July. The plan was made public just after the Federal Open Market Committee was faced with the highest inflation since the 1980s. George is a well-known hawkish policy supporter. She criticized the current monetary policy and the actions of committee members, as they focused belatedly on the fight against inflation, even though they called it top priority.

Fed policymakers and a number of experts believe that the recent price rises have been caused by supply chain disruptions. These emerged due to a new Coronavirus outbreak in China, as well as a shortage of semiconductors and Russia's recent invasion of Ukraine. As for the labour market, employment hit its highest level. This has boosted prices in sectors of the US economy where demand has not yet fully recovered to pre-pandemic levels. Employers in the service sector have recently tried their best to hire as many workers as possible amid a wave of retirements as well as a significant drop in immigration.

"The inflation we are now experiencing is obviously both too high and too broad to dismiss. The central bank's job is to prevent persistent imbalances from feeding into inflation and unmooring inflation expectations. By influencing interest rates, the Federal Reserve primarily affects the demand side of the imbalance. The evolution of its efforts alongside other factors will affect the course of monetary policy, requiring continuous and careful monitoring," George said.

There is a rather interesting trend occurring in the British pound at the moment. Active action to defend 1.2540 allows a new lower border of the upward retracement channel to be built. In the short term, the bulls will probably look to move beyond 1.2600. This will strengthen the Pound's gains. A breakout of 1.2600 will lead to an immediate jump of the trading instrument to 1.2640 and 1.2690. A breakout of 1.2540 would put pressure back on the pound. This would open the way to the lows of 1.2500 and 1.2450. The furthest target in current conditions would be support at 1.2390, which would be touched up should a rather weak set of fundamental statistics be released this week.