After the Federal Reserve announced the US interest rate hike, as expected, the price of the US dollar against the Japanese yen gained an upward momentum. This led to it towards the level of 137.45, but the currency pair did not enjoy gains for long, as it returned to retreat to the support level 136.40 following comments from the governor. Federal Reserve officials raised US interest rates by 75 basis points for the second month in a row, providing severe tightening in more than a generation to curb rising inflation – but they risk delivering a heavy blow to the economy.

US monetary policy makers, facing the hottest price pressures in 40 years, raised the target range for the federal funds rate on Wednesday to 2.25 percent to 2.5 percent. This brings the cumulative increase from June to July to 150 basis points – the largest rise since Paul Volcker’s anti-price era in the early 1980s.

In its statement, the FOMC said it was “strongly committed to returning inflation to its 2 percent target,” it said in a statement issued in Washington, repeating previous language that it was “extremely concerned with inflation risks.” The FOMC reiterated that it “expects that continued increases in the target range will be appropriate”, and that it will adjust policy if risks arise that may impede achieving its objectives.

US stocks remained high after the decision. Short-term Treasury yields rose, and the dollar fell.

FOMC Meeting Updates

The FOMC vote, which included two new members, Vice President for Supervision Michael Barr and Boston Fed President Susan Collins, was unanimous. Adding Barr to the board of directors earlier this month gave him a full line-up of seven governors for the first time since 2013.

Officials have been criticized for underestimating inflation and slow to respond, and they are now aggressively raising interest rates to cool the economy, even if it threatens to push it into recession. And higher prices are already having an impact on the US economy. The effects are particularly evident in the housing market, where sales have slowed.

While Federal Reserve officials assert that they can manage a so-called “soft landing” of the economy and avoid a sharp deflation, a number of analysts say the recession with rising unemployment to significantly slow price gains. The Federal Open Market Committee noted that “recent indicators of spending and production have declined,” but it also noted that job gains “have been strong in recent months, and the unemployment rate has remained low.”

The recent increase puts US interest rates close to the Fed policy makers’ estimates of neutrality – a level that neither speeds up nor slows down the economy. Forecasts in mid-June showed officials expected to raise rates to about 3.4 percent this year and 3.8 percent in 2023. Investors are now watching to see if the Fed will slow the pace of rate increases at its next meeting in September, or If strong price gains pressure the central bank to continue the large-volume hikes.

Central banks around the world are fighting a battle against rising prices. Earlier this month, the Bank of Canada raised interest rates by a full percentage point and surprised the European Central Bank with a half-point larger-than-expected move, its first increase in more than a decade.

USD/JPY Daily Forecast:

Despite the recent stability, the USD/JPY currency pair is still maintaining the bullish trend. The first reversal of the general trend will not occur according to the performance on the daily chart without the currency pair moving below the 134.40 support level. I still prefer buying USD/JPY from every bearish level. On the other hand, and over the same time period, breaking the resistance 137.85 will be important for the bulls to launch towards the awaited psychological top 140.00 at the earliest time. Today’s US dollar pairs will be affected by the announcement of the US economic growth rate.

Ready to trade our daily Forex analysis? We’ve made a list of the best Forex brokers worth trading with.

The hopes of euro investors quickly evaporated in the recent hawkish statements from European Central Bank officials headed by Lagarde about the approaching date for raising the ECB interest rate 11 years ago. The EUR/USD currency pair tumbled from the resistance level 1.0773 to the support level 1.0506 and is stabilizing around the level 1.0515 at the beginning of this important week’s trading. We indicated when the euro’s recent gains will not last long because the US Federal Reserve will be the fastest and strongest in raising interest rates than the European Central.

Currently, traders are seeking the European Central Bank’s support to smash bonds with the approach of price hikes. Markets are not convinced that the European Central Bank can raise interest rates and maintain bond yields for the most indebted eurozone members at the same time. Italy, one of the countries most exposed to rising borrowing costs, saw its 10-year debt drop after the biggest drop since the pandemic, as European Central Bank President Christine Lagarde outlined plans last Thursday to raise interest rates for the first time in more than a decade.

Meanwhile, the spread on German bonds approached towards levels that recently prompted the European Central Bank to start buying sovereign debt in an effort to stabilize the currency bloc as Covid-19 swept the continent in March 2020.

Investors are concerned about the lack of a credible plan to tackle so-called fragmentation – unjustified jumps in borrowing costs for weaker eurozone countries compared to stronger economies. Some say that only the new instrument, separate from previous bond-buying programs, can contain the spreads. Commenting on this, Nicholas Forrest, head of global fixed income at Candriam, a $180 billion asset manager, said: “This is an ‘whatever it takes’ moment for Lagarde. He was referring to a speech by former European Central Bank President Mario Draghi, who pledged to ensure the safety of the eurozone at all costs as the sovereign debt crisis erupted in 2012.

Meanwhile, Forrest is particularly cautious about Italian and Spanish debt given the volatility and potential for increased bond issuance from those countries. “The European Central Bank will need to avoid policy mistakes,” he said.

Global central banks face an unstable equilibrium process as they seek to combat rising prices without disrupting business activity. The situation in the eurozone is unique, with 19 disparate economies whose fiscal policies are not aligned. The fear is that without a plan, excessive widening of spreads could divert the ECB from its mission to combat inflation, forcing it to halt or even begin to reverse the rate-raising cycle.

What has so far been earmarked for retail processing – reinvestment from maturing debt accrued under the European Central Bank’s pandemic asset purchase program – is widely seen as insufficient. Programs like the outright cash transactions, which Draghi created during the last crisis, still exist, but are seen as too inflexible to be appropriate now.

A new machine is in the works as Bloomberg reported in April. Details are still scarce. Some analysts believe that spreads of around 250 basis points could prompt the European Central Bank to intervene, even if only by disclosing the instrument. We are not at those levels yet. The German-Italian bond spread is at 225bp – far from the 500bp gap seen in the worst days of Europe’s sovereign debt crisis.

But the uncertainty weakened the euro, erasing gains after Lagarde offered only vague reassurance that “if needed in the future we can design, we can deploy the right tool”.

According to the technical analysis of the pair: On the daily chart, the price of the euro currency pair against the dollar EUR/USD is moving towards the support level 1.0500. This which will support the bears’ control of the trend and prepare to move towards the stronger support levels that are closest to it. This is according to the performance over the time period 1.0460 and 1.03800, respectively, as the last level is support for the move of technical indicators towards oversold levels, from which a resumption of buying can be considered.

It must be considered that this week’s events are important and affect the forex market in general, and the US Central Bank’s announcement on Wednesday is the most influential, and the movement may remain in narrow ranges until this date. On the upside, the bulls should return to the vicinity of the 1.0795 and 1.1000 resistance levels, otherwise the general trend will remain bearish.

So far, the attempts of the GBP/USD currency pair have not succeeded in recovering from its recent sharp losses, which brought it to the support level 1.2411. Attempts to recover did not exceed the 1.2615 level, and the currency pair settles around the 1.2470 level at the time of writing the analysis. GBP/USD awaits important and influential events today. The first of which is the decisions of the US Federal Reserve, and tomorrow the policy decisions of the Bank of England, the tone of the announcements of these banks, will be the main driver for the sterling-dollar pair in the coming days.

Amid cautious stability and anticipation of stimulus, the Federal Reserve (Fed) may need to postpone the expected start of the process of reducing the balance sheet known as quantitative tightening in order to avoid further losses and restore its balance in a more sustainable way.

While other factors such as risk appetite in the global market have been at play, the recent losses in the pound sterling reflect the emerging gap between the Federal Reserve and the Bank of England (BoE) as in everything else, while also true of other currencies. Monetary policy, its impact on US bond yields and the comparative advantage it gives, the dollar will come back into focus this week when the Federal Reserve announces its latest policy decision on Wednesday and before Thursday’s equivalent from the Bank of England.

The Fed is widely expected to raise the US interest rate by 50 basis points, with the Fed raising the range to between 0.75% and 1%, after Governor Jerome Powell confirmed that this would be on the table at the May meeting. The bank is also seen as likely to announce its plan for a balance sheet cut known as quantitative tightening (QT) and it’s around that part where market expectations may be in danger of collapsing on Wednesday.

For his part, US Central Bank President Jerome Powell said of the QT announcement at the press conference last month: “We will take into account the broader financial and economic contexts when making the decision on timing, and we will use our tools to support financial and macroeconomic stability.” “We always want to use our tools to support macroeconomic and financial stability and we want to avoid adding uncertainty to an already very uncertain situation,” he added.

This was noteworthy in the context of recent dollar strength and losses in other currencies, which are an inflationary headache that risks causing the European Central Bank (ECB) and Bank of England (BoE) to raise interest rates sooner or faster than they otherwise would. Commenting on this, Stephen Gallo, FX analyst at BMO Capital Markets, says, “Judging by recent remarks from Philip Lane and President Lagarde, a weak euro is a concern for the ECB.”

It is also possible that a stronger dollar and US bond yields have prompted the People’s Bank of China (PBoC) to hesitate to provide stimulus in China as coronavirus containment measures accelerate the earlier slowdown and heighten market concerns about the global economic outlook.

According to the technical analysis of the pair: The general trend of the GBP/USD currency pair is still bearish. The recent losses have moved some technical indicators towards oversold levels. The continuation of the weakness factors mentioned above may push forex traders to push the pair to deeper descending levels, and the closest to it is currently 1.2420 and 1.2300 respectively. As mentioned before, the tone of the central banks this week will remain the main driver of the currency pair in the coming period. According to the performance on the daily chart, the currency pair needs to break the psychological top 1.3000 in order to make a shift in the current general bearish trend.