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23.03.202312:15 Forex Analysis & Reviews: Fed will continue to pursue its inflation target

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Dollar slipped a lot after the Fed announced its decision on interest rates. Although the accompanying statement was very much about how the recent turmoil will not change the committee's stance on its inflation targets as the latest indicators point to moderate growth in spending and output, a rate hike of only 25.0% is a clear indication that the central bank is afraid of what is happening and would like to avoid even more problems in this direction.

Exchange Rates 23.03.2023 analysis

With US job growth picking up in recent months at a faster-than-expected pace, the Fed has concerns that inflation will remain elevated in the first half of this year.

As for the US banking system, the central bank said it is sound and resilient, but recent events are likely to lead to a tightening of credit conditions for households and businesses, which will put pressure on economic activity, hiring and including inflation. That will be good for the central bank, however, it is difficult to determine the extent of these effects, so the committee will have to continue paying very close attention to risks and fight them.

The Fed also mentioned that they aim to achieve maximum employment while returning to 2% inflation in the long term. In support of these goals, it decided to raise the target range for the federal funds rate to 5%.

All that needs to be done next is to keep a close eye on incoming information and assess its implications for monetary policy. The Fed expects that an additional policy tightening may be appropriate to achieve a sufficiently restrictive stance that would return inflation to 2% over time. Of course, the central bank will take into account how monetary policy affects economic activity and inflation when determining the extent of a future increase in the interest rate target range.

Economic and financial developments will also be important, so the committee is expected to continue reducing the Fed's balance sheet in the form of Treasury securities, debentures and mortgage-backed bonds. And if necessary, the Fed is prepared to adjust its monetary policy stance. That will happen if risks arise, especially if it threatens the banking system or the objectives of the committee.

In terms of the forex market, euro bulls still have all the chances to renew the March highs, but to do this they need to hold the quote above the support level of 1.0870. That will allow EUR/USD to rise beyond 1.0930 and head towards 1.0965 and 1.1000. In case of a decline, the pair will fall below 1.0880, and then go to 1.0840 or 1.0800.

In GBP/USD, bulls are ready to keep storming the monthly highs, but they have to keep the quote above 1.2280 and breakthrough 1.2330. That will push the pair to 1.2390 and 1.2450. Should bears take control of 1.2280, a slide towards 1.2220 and 1.2180 is possible.

Jakub Novak
Analytical expert of InstaForex
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