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Euro and pound rose on Friday after Fed Chairman Jerome Powell stated that stress in the banking sector could lead policymakers to reconsider their approach to interest rates while maintaining control over inflation.
He noted that the Fed's initiatives used to address issues in medium-sized banks have helped prevent the development of worst-case scenarios. However, problems in Silicon Valley Bank and other similar banks will impact the economy in the future. As such, it is likely that the Fed will halt its rate hike cycle in June even if inflation is high.
"Many people are currently experiencing high inflation for the first time in their lives. We believe that the inability to reduce inflation will not only prolong the pain but will also ultimately increase the social costs of returning to price stability. This will inflict further harm on households and businesses, and we seek to avoid that," Powell said.
The Fed chief also characterized the current policy as restrictive, adding that future decisions will depend on data rather than a pre-set course.
At the last meeting, the FOMC raised the benchmark lending rate to the target range of 5-5.25%. Officials emphasized that rate hikes occur with a lag of a year or more, so the measures have not fully manifested their impact on the economy. The current monetary policy is largely aimed at cooling down the labor market, where the current unemployment rate of 3.4% is the lowest since 1953. Economists, including those within the Fed, have long predicted that raising interest rates will lead the economy into a mild recession by the end of this year, but there are no significant reasons for concern.
In terms of the forex market, euro is still bearish, but seeing growth is not impossible. For this, the quote has to remain above 1.0790, or reach 1.0835. This will allow a rise beyond 1.0870, heading towards 1.0905. In case of a decline around 1.0790, euro will fall to 1.0760 and 1.0720.
Pressure on pound also remains, so to see growth, the quote has to consolidate above 1.2470. Only that will trigger a much larger rise to 1.2510 and 1.2540. In case there is a decline, bears will attempt to take 1.2420, which could lead to a fall to 1.2390 and 1.2350.
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