07.03.202411:01 Forex Analysis & Reviews: Fed Chairman's testimony in Congress hurts US dollar

Federal Reserve Chairman Jerome Powell told lawmakers yesterday that the US central bank is in no hurry to cut interest rates and will keep them at current levels until policymakers are confident that victory over inflation has been achieved. However, the markets did not react much to the statements. Given the latest fundamental data, more and more factors are emerging, indicating possible changes in monetary policy by this summer.

Speaking on the House floor on Wednesday, the Fed chief said it would likely be prudent to start lowering borrowing costs "at some point this year" but gave no other specifics, making it clear that policymakers are not yet ready to do take such measures. The statements echo the message from nearly every Fed official in recent weeks. The economy and labor market are strong, meaning policymakers have time to wait for more evidence that inflation is returning to the target rate before cutting rates.

"The committee does not believe it is appropriate to reduce the funds rate until it has greater confidence that inflation is sustainably approaching 2%," Powell told the House Financial Services Committee, adding that officials will approach that decision "carefully and thoughtfully."

They also discussed a plan to increase the capital requirements of large banking institutions in the country. Republican lawmakers used the private meeting with Powell to criticize this kind of action, calling on him to abandon the current proposal - a move that Powell said he also would not rule out. Meanwhile, Democrats warned that high interest rates were making the availability of credit, on which the entire American economy rests, too expensive.

It is clear that Fed officials are now in the final stages of an aggressive fight to curb inflation. After raising the benchmark federal funds rate by more than five percentage points starting in March 2022, the FOMC has kept interest rates unchanged since last July even as inflationary pressures appear to be easing.

At their policy next meeting, the rate-setting committee will again decide how soon and by how much they should cut rates. Officials worry that lowering borrowing costs too early will trigger a surge in economic activity that would keep inflation above 2%, a level they consider appropriate for a healthy economy. On the other hand, keeping borrowing costs high for too long poses a threat of pushing the economy into recession. To be fair, this story does not threaten the US economy yet because the latest GDP growth rates continue to impress.

"If the overall economy progresses as expected, it will likely be appropriate to begin monetary easing," Jerome Powell said in prepared remarks, adding that progress toward the 2% inflation target is not yet guaranteed at this time.

Asked later when the Fed would be ready to cut rates, Powell said: "We think that because of the strength of the economy, the strength of the labor market and the progress we've made, we may discuss that step, but when that will be is not yet known."

As for the current technical picture of EUR/USD, demand for the euro remains. Now buyers need to think about how to conquer the level of 1.0915. Only this will allow them to test 1.0945. From there, the price can climb to 1.0965, but doing this without support from major players will be quite problematic. The farthest target will be a high of 1.0998. If the instrument declines only in the area of 1.0825, I expect some serious actions from large buyers. If there is no one there, it would be a good idea to wait until a low of 1.0855 is updated, or open long positions from 1.0830.

Regarding the current technical picture of GBP/USD, the bulls need to take the nearest resistance at 1.2760 to develop an uptrend. This will allow them to target 1.2800, above which it will be quite problematic to break through. The farthest target will be the area of 1.2825, after which we can talk about a sharper surge of GBP/USD to 1.2850. If the pair falls, the bears will try to take control of 1.2725. If this can be done, a breakout of the range will deal a serious blow to the positions of the bulls and push GBP/USD to the low of 1.2690 with the prospect of reaching 1.2660.