The release of the Fed's minutes of the meeting led to a surge in volatility in the forex market and a more serious drop in the US stock market. Considering that expectations almost coincided with the final results, pressure on both euro and pound was restrained. The strong oversold position of the euro and the tight position of pound buyers around 1.3050 also limited the downward potential of both currencies.
Reportedly, the Federal Reserve will cut its balance sheet by $95 billion every month, which will further tighten monetary policy, as the central bank already planned to raise interest rates to counter sky-high inflation.
According to the latest Fed minutes, many officials were already in favor of increasing rates by half a percentage point, but still voted for changing it by a only quarter point in light of the ongoing conflict in Ukraine. As for the Fed's balance sheet, officials have proposed to start reducing it by $60 billion (Treasury bonds) and $35 billion (mortgage-backed securities) every month, which is twice as high as what the market expected.
If both moves really happen, there will be a sharp reversal in the fight against inflation because the central bank bought bonds last month, trying to make the economy's landing smoother. Despite that, many still expect to see the Fed to approve the balance sheet cut at its next meeting on May 3-4, as well as a raise in interest rates by 0.5%. Fed officials practically confirmed this earlier, for example, when San Francisco Fed President Mary Daly said the Fed will use its tools to fight inflation with all its might. Lael Brainard made similar statements, saying that interest rate hikes could take place at a more aggressive pace than the usual 0.25 percentage point increase.
Fed officials also agree that they already made significant progress on their goals, so they believe that it is safe to reduce the size of the balance sheet. In the event of further increase in price pressure, one or more more aggressive interest rate increases of 50 basis points would be appropriate.
Now, the main goal of the Federal Reserve is to return inflation to a neutral rate, that is, a level that does not accelerate or slow down economic activity. They said that depending on economic and financial developments, a move to a tougher policy could be justified. After all, CPI in February 2022 already rose by 7.9%, which is the highest since 1982. The Fed's 2% inflation target is based on a separate measure, the Personal Consumption Price Index, which rose 6.4% in the 12 months to February.
Technical analysis of EUR/USD
Tensions in Ukraine have risen again to a fairly serious level. Given the aggressiveness of the Fed's policy, it is best to bet on the further strengthening of dollar. At most, euro buyers need a break above 1.0925 to get the market back under their control. That move will lead to a rise to 1.0970 and 1.1010. In case of a decrease in the pair, buyers will be able to count on support in 1.0880. Its breakdown will quickly push the quote to 1.0840 and 1.0770.
Technical analysis of GBP/USD
Pound remains in a wide side channel, and in order to continue rising, bulls need to think about how to return the resistance at the bottom of the 31st figure. A break of this range will open the way to 1.3135, and then to 1.3165, which is the upper limit of the sideways channel. But if the bears break through 1.3060 and go beyond the lower range, the apir will dip to 1.3000 and 1.2960.
