EURUSD dropped to test initial support after the Federal Reserve’s meeting minutes hinted at another interest rate hike.
EURUSD: Daily Chart
EUR/USD is testing the initial pullback level at 1.0850, with strong support at 1.0675. Moving lower is the 1.0525 level.
Some takeaways from the FOMC Minutes:
“In discussing the policy outlook, all participants continued to anticipate that, with inflation still well above the Committee’s 2 percent goal and the labour market remaining very tight, maintaining a restrictive stance for monetary policy would be appropriate to achieve the Committee’s objectives. Almost all participants noted in their economic projections that the judgement of additional increases in the target federal funds rate during 2023 would be appropriate”.
FOMC participants also discussed the potential for inflation to become unanchored and rise higher.
“Almost all participants stated that, with inflation still well above the Committee’s longer-run goal and the labour market remaining tight, upside risks to the inflation outlook or the possibility that persistently high inflation might cause inflation expectations to become unanchored remained key factors shaping the policy outlook”.
So, the hawkish element of the FOMC wanted to raise rates again in June, but the Federal Reserve majority decided to pause to view further data releases.
Markets are now seeing the chance of a rate hike in July, unless the data changes significantly. The latest job market numbers will test that this Friday, with jobs and wages being a key reason for the continued rate levels.
Another issue for the interest rate level is that policymakers see upward pressure on money-market rates due to the large issuance of Treasury bills that will be needed following the debt-limit standoff.
Officials were also concerned about further stress in the banking system, saying,
“Despite the receding of the stresses in the banking sector, some participants commented that it would be important to monitor whether developments in the banking sector lead to further tightening of credit conditions and weigh on economic activity.”
Finally, the central bank’s staff economists continue to expect a “mild recession” starting later this year.
“Real GDP was projected to decelerate in the current quarter and the next one before declining modestly in both the fourth quarter of this year and the first quarter of next year”.
