10.05.202217:01 Forex Analysis & Reviews: High interest rates won't hurt the American labor market – but that's not for sure

The euro continues to hover in one place, as interest in risks among investors and traders does not even think to return. More and more American politicians are expressing concern about high inflation and the labor market, which could seriously suffer because of it the Central Bank will need tougher measures to return monetary policy to normal. However, some believe that the current situation with an increase in interest rates is not as dangerous as it may seem. "The increase in the interest rate by the US central bank should help reduce inflation, while not causing an increase in the unemployment rate," said John Williams, president of the Federal Reserve of New York. "The task of monetary policy is clear today: reduce inflation while maintaining a strong economy. And even though the task is very difficult, it does not mean that it is not solvable."

During his speech, the head of the New York Fed outlined a scenario in which higher interest rates will help reduce the inflation rate "to almost 4%" before it drops to the target value set by the Central Bank in the region of 2.5%. Inflation will be able to reach this level only in 2023, after which it will return to the value of 2% in 2024. According to him, the US labor market and economy should continue to demonstrate strength and resilience even with interest rates rising to 2%, which are expected by the end of this year. At the same time, the unemployment rate, according to Williams, will remain at the current low level of 3.6%.

More recently, data came out that confirmed the strength of the American labor market, but the report turned out to be worse than economists' forecasts, as many expected a decline to 3.5%. It is worth saying that in the conditions of finding the labor market at its peak values - when maximum employment is reached, minor changes in this indicator do not play any role. Let me remind you that last week the Fed went to raise the key interest rate on federal funds by half a percent, which was the largest one-time increase since 2000. Chairman Jerome Powell told reporters that he is ready to continue these steps with an additional increase of half a percent at the next two meetings, which will be held in June and July.

During his speech, Williams did not raise the topic of the pace of rate increases and also chose to ignore the possible endpoint of their increase this year. The politician only noted that he expects the central bank to take the necessary measures to return the federal funds rate to a more normal level this year.

Let me remind you that according to the latest data, in the 12 months to March of this year, the inflation rate in the United States, according to the Fed's preferred indicator, was 6.6%, which is the highest value in 40 years. Real inflation has completely exceeded the figure of 8.5% and probably reached 9.0% already in April. Williams also pointed to many factors driving up inflation, including increased demand for goods and housing due to the pandemic. The hot labor market and global supply chain problems, partly exacerbated by the Russian special operation on the territory of Ukraine, also contribute to increased inflationary pressure.

"It is obvious that the actions taken in the field of monetary policy will weaken demand in the near future, which will lead to lower prices. I also expect that over time, the factors contributing to the shortage of supply will be eliminated, which will lead to some rebalancing," the politician said.

EUR

After stabilizing at 1.0470, the bulls began to gradually accumulate a position. Expectations of a more aggressive policy of the European Central Bank make the European currency more attractive, especially after the recent decision of the US central bank. Worsening geopolitical tensions due to Ukraine's refusal to negotiate, as well as problems with supply chains in the eurozone countries, limit the upward potential of risky assets. In the short term, it is best to bet on a major upward correction of the pair. To stop the bear market, buyers need to protect the nearest support of 1.0530. If you miss it, most likely the bears will fail the trading instrument by the annual minimum of 1.0470. A more distant target will be the support of 1.0420. It is possible and necessary to talk about a correction of the euro, but first, the bulls need to get above 1.0590. Only after that, they will aim for a breakout of 1.0640. From there, the road is expected to go up to 1.0690 and 1.0740.

GBPUSD

Buyers of risky assets have protected 1.2260 and are now trying to come up with something at the base of the 23rd figure. But it is worth noting that the medium-term bearish trend has not gone away, and the observed correction can end very quickly - just give a reason to large sellers. The reason may be weak fundamental data, which are expected for the UK this week. In the short term, I advise you to buy the pound on pullbacks down, as it is possible to strengthen the bullish presence. The nearest resistance level is now located around 1.2370. A break in this range will lead to an instant breakthrough of the trading instrument at 1.2440 and 1.2505. A break of 1.2300 will strengthen the bear market, which will open the way to new lows: 1.2260 and 1.2180. The farthest goal in the current conditions will be the support of 1.2070, which will be updated in case of deterioration of the UK economy very quickly.