29.06.202610:55 Forex Analysis & Reviews: Why US dollar unwilling to give up

Last Friday, Richmond Fed President Tom Barkin joined the ranks of hawks inside the regulator, bluntly calling inflation "too high," which boosted the dollar against a number of risk assets.

Barkin's main worry is that the rise in inflationary pressure has gone beyond energy prices. The war with Iran indeed pushed oil and commodity prices up, but the increase proved much broader. "It is hard to be confident that we will return to 2% without further influence from the policy rate, the labor market, or other disinflationary factors," he said. That is a significant admission. If only expensive oil had driven inflation, the problem would fade as the Strait of Hormuz reopened. But when pressure is broad?based, prices may not return to target without monetary policy action.

Barkin does see encouraging signs, especially in his district. He was heartened by the sharp drop in gasoline prices following the oil slump after the Iranian agreement. He believes tariff and oil?shock pressures should now ease and help disinflation. But one factor that can negate that is persistently high consumer spending. Neither tariffs nor expensive energy over the past year have cooled Americans' appetite to spend. In a consumption?driven economy, that alone can prevent inflation from returning to target.

Particularly notable is Barkin's observation about business behavior, which explains the mechanics of persistent inflation. "When firms set prices, they look at today's inflation, so I think inflation will persist," he said. That is the self?reinforcing spiral central bankers fear most: firms incorporate current high inflation into future prices, thereby entrenching it and passing it on to consumers. That is why Barkin views modest restraint as a sensible step.

Barkin's comments fit into the hawkish chorus of recent days I mentioned earlier. Williams said rates are well positioned to return inflation to target; Goolsbee warned of movement in the wrong direction; Hammack flagged a possible need to act; and Kashkari allowed for a rate hike in the face of headline inflation.

For markets, the signal is clear. A growing number of Fed officials are openly talking about a possible rate hike this year, and Barkin only reinforces that expectation.

Technical picture on EUR/USD

Buyers now need to think about taking out 1.1415. Only that would allow them to target a test of 1.1450. From there, a move to 1.1480 is possible, but doing so without support from major players will be difficult. On a decline, I expect significant buying only around 1.1380. If there is no interest there, it would be better to wait for a renewed low at 1.1340 or to open longs from 1.1320.

Technical picture on GBP/USD

Pound buyers need to clear the nearest resistance at 1.3225. Only then can they target 1.3244, above which it will be hard to break through. The farther target is around 1.3270. If the currency pair falls, bears will try to take control of 1.3190. If they succeed, a break of that range would deal a serious blow to bulls and push GBP/USD toward 1.3170 with the prospect of reaching 1.3140.