01.04.202612:46 Forex Analysis & Reviews: Inflation could get stuck at 3%

Meanwhile, as the US dollar is actively falling against the euro and the pound, largely due to another victory claimed by Trump over Iran, prospects inside the Fed look less optimistic.

Jeff Schmid of the Federal Reserve Bank of Kansas City warned yesterday that the US central bank should not ignore the inflationary impact of the sharp rise in energy prices caused by the conflict in Iran. "This oil shock comes at a time when inflation already has been too high for too long," Schmid said Tuesday in remarks prepared for an event in Oklahoma City. "With inflation already running hot, now is not the time to assume that the inflation from higher oil prices will be transitory."

Schmid stressed that past episodes of oil shocks, such as in the 1970s, differed from the current situation. Back then, central banks often underestimated the persistence of inflationary pressure from high oil prices, which later required more decisive measures. He urged the Fed to remain vigilant and avoid repeating those mistakes, insisting that the current rise in energy prices could have longer-term consequences for overall inflation.

Schmid said that higher oil and gas prices will likely show up in core inflation through items such as airfares and other transport costs. He noted that prices have been rising faster than the Fed's 2% target for five years and expressed concern that inflation could get stuck at a level close to 3%.

The president of the Federal Reserve Bank of Kansas City, nonetheless, broadly praised the state of the economy, noting that growth and consumption remain strong despite low unemployment. Although the sharp jump in oil prices will somewhat slow growth, in his view the downturn will not be as deep as it might otherwise be.

Schmid said that, given the many conflicting trends pushing employment and inflation in different directions, policymakers faced trade-offs in fulfilling the dual mandate and that after weighing those trade-offs he was more focused on inflation risks.

Recall that at the meeting held on March 17–18 Fed officials left interest rates unchanged, and Chair Jerome Powell said it was still too early to judge how the rise in energy prices will affect the economy. Some Fed members, like Schmid, expressed concern about the sharp rise in energy prices and said it will likely push inflation higher.

As for the current technical picture of EUR/USD, buyers now need to think about taking the 1.1590 level. Only that will allow targeting a test of 1.1630. From there, a move to 1.1665 is possible, but doing so without support from major players will be rather problematic. The most distant target is the high at 1.1705. In case of a decline of the instrument only to around 1.1550, I expect any serious action from large buyers. If nobody appears there, it would be wise to wait for a refresh of the low at 1.1510 or to open long positions from 1.1480.

Regarding the current technical picture of GBP/USD, pound buyers need to take the nearest resistance at 1.3295. Only this will allow targeting 1.3328, above which a breakthrough will be rather difficult. The most distant target will be the area around 1.3366. In the event of a decline, bears will try to seize control of 1.3265. If they succeed, a break of the range will deal a serious blow to bulls' positions and push GBP/USD toward the low of 1.3225, with a prospect of reaching 1.3191.