14.04.202609:33 Forex Analysis & Reviews: Long-term inflation expectations unrevised despite energy shock

The US dollar is losing ground, and traders are once again rushing to buy risk assets in hopes of further negotiations between the US and Iran. Meanwhile, Federal Reserve policymaker Steven Miran said in remarks yesterday that the energy shock caused by the war with Iran has so far not affected long?term inflation expectations, and he expects price pressures to return to the central bank's target within a year.

"There is no evidence so far that inflation expectations are elevated," Miran said on Tuesday at an event in Washington. "Given that the labor market has been gradually cooling and that trend has persisted for about three years, it is highly unlikely that we will see a so-called wage-price spiral. Therefore, for now, the central bank's traditional view — not to respond to a shock driven by changes in patterns — seems reasonable to me."

Miran's comments had a calming effect on markets that had feared a protracted conflict in the Persian Gulf could trigger a new round of wage inflation. According to the Fed official, analysis of inflation expectations data, both short- and long-term, has not revealed significant deviations from established targets. That signals economic agents' confidence in the central bank's ability to control inflation over the medium term.

Miran stressed that, in the Fed's view, the current price volatility in energy markets is temporary. Assuming no further escalation of the conflict and successful restoration of oil production in other regions, energy prices are expected to gradually fall. That, in turn, would slow inflationary pressures across sectors of the economy.

"As the data show, during energy crises, prices typically move quickly and then stop, limiting the inflationary impact," Miran said. "If we look at the situation a year from now, I expect inflation to be fairly close to our target."

The minutes of the Federal Open Market Committee meeting of March 17–18 showed that a growing number of Fed officials are concerned that the war with Iran could further stoke inflation. At that meeting, officials left the Fed's policy rate in a 3.50%–3.75% range, while Miran dissented, calling for a quarter-point cut. Since his appointment as Fed chair by President Donald Trump last September, he has urged fellow policymakers to lower rates more quickly.

EUR/USD

Buyers now need to take the 1.1800 level to target a test of 1.1825. From there, the currency pair can push to 1.1848, although doing so without support from large players would be difficult. The further target is the high at 1.1870. On a decline, I expect buyers to step in around 1.1760; if no one shows up there, it would be prudent to wait for a new low at 1.1740 or to open long positions from 1.1710.

GBP/USD

Pound buyers need to take the nearest resistance at 1.3545 to target 1.3575, above which a breakout will be difficult. The further target is the 1.3605 area. On a drop, bears will try to seize control at 1.3510. If they succeed, a break of the range would deal a serious blow to bulls and push GBP/USD toward the low at 1.3485 with a prospect of reaching 1.3450.