Markets acknowledged widespread signs that the US economy is slowing. This is despite a clear warning against assumptions that the Federal Reserve could push back on raising interest rates further or start cutting them at some point in the first months of the new year.

The trading week, in which the bulls dominated the direction of the USD/JPY pair, ended with gains, crossing the resistance level of 137.70 and closing stable around the resistance of 137.50.

This gave back to the markets the momentum for the possibility of moving towards the next psychological resistance of 140.00. The US dollar gained more momentum from the hawkishness that the Federal Reserve Bank of America representatives, led by Jerome Powell, signaled. They stated the bank is determined to raise American interest rates strongly until the American inflation, which has reached its highest level in 40 years, is contained.

Jerome Powell’s historic speech on Friday focused heavily on three key lessons for policymakers to draw from the Fed’s experience with inflation during the dark decades of the 1970s and 1980s, but he also offered a realistic assessment of the outlook for the U.S. economy as the bank tries to push inflation down from its highest levels in several decades.

“The restoration of price stability will take some time and requires the strong use of our tools to achieve a better balance between supply and demand. Lowering inflation will likely require a sustained period of flat growth. Furthermore, it is very likely that there will be some partial decline in the labor market,” said Powell, “While high interest rates, slow growth, and soft labor market conditions will lead to lower inflation, they will also cause some pain for households and businesses. And these are the unfortunate costs of reducing inflation. But the failure to restore price stability will mean much more,” he added.

Markets acknowledged widespread signs that the US economy is slowing. This is despite a clear warning against assumptions that the Federal Reserve could push back on raising interest rates further or start cutting them at some point in the first months of the new year.

The speech came as financial markets try to gauge whether federal policymakers will opt for a 0.75% sequential increase in the federal funds rate at the September meeting and amid much curiosity about how quickly the bank will raise borrowing costs to the “terminal” level during the following months.

June forecasts indicated the level was somewhere near the 4 percent handle and would likely be reached in the early months of 2023, but Chairman Powell reminded that those forecasts will be updated soon, and other federal policymakers have recently called for a steeper path.

In general, the gloomy economic outlook and the lingering upside risks regarding the path of the US interest rate in the future are some of the possible reasons why the initial dollar sales in the wake of Friday’s session did not last long, although not all observers share the same views.

Expectations of the USD/JPY:

• In the near term and according to the performance on the hourly chart, it appears that the USD / JPY currency pair has recently completed an upward breakout from the formation of a gently descending channel. This indicates the existence of a large upward wound in the short-term market sentiment.
• Therefore, the bulls will look forward to the extension of the current rise towards the resistance 137.91 or higher to the resistance 138.36. On the other hand, the bearish speculators will target short-term profits at around 137.07 or below at the 136.59 support.
• In the long term and according to the performance on the daily chart, it seems that the USD/JPY is trading within the formation of an ascending channel. This points to a large long-term upward wound in market sentiment.
• Therefore, the bulls will target the long-term profits at around 139.38 or higher at the 141.74 resistance. On the other hand, bears will look to pounce on profits at around 134.99 or lower at 132.52 support.

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For the second week in a row, the price of the EUR/USD currency pair is moving in narrow ranges. This  vicinity warns technically of an upcoming strong move, as the markets absorbed what was announced to raise US interest rates at the largest pace since 2000. The US jobs numbers were announced and today the important US inflation numbers will be announced as well. Euro-dollar losses brought it to the level of 1.0470, the lowest in five years, and attempts to rebound higher did not exceed the 1.0630 level during that period. It is settling around the 1.0526 level at the time of writing the analysis.

The Federal Reserve has said that Russia’s war in Ukraine and rising inflation are now the biggest threats to the global financial system, replacing the coronavirus pandemic. The notes came in the Federal Reserve’s semi-annual Financial Stability Report, which looks at trading and investment trends as well as general economic issues. The report is not an economic forecast, nor does it attempt to predict the following risks to the financial system. It highlights areas of interest to central bankers.

The Fed added that economic uncertainty has increased since the bank’s previous report, with the Ukraine war being a large part of the deterioration. The bank also highlighted significant fluctuations in asset prices – from Treasuries to stocks – as investors reassess risks in a high-inflation environment. “Inflation was higher and more stable than expected, even before the invasion of Ukraine, and uncertainty about inflation expectations poses risks to financial conditions and economic activity,” the Fed added in its report.

The Fed said persistently high inflation could require central banks to raise interest rates quickly, which could also be a potential risk of financial instability in the form of lower economic output as well as higher borrowing costs for individuals and businesses. This could cause debt levels, which the Fed says are high but not yet a major concern, to become unsustainable for some companies.

The US central bank also said, “More negative surprises in inflation and interest rates, especially if accompanied by a decline in economic activity, could negatively affect the financial system.” For individuals, inflation could cause job losses as the Federal Reserve increases interest rates, which could also affect the housing market through higher mortgage rates, the bank said.

The report reflects the Fed’s thinking, its conclusions may be part of the background when the central bank conducts annual stress tests of the nation’s largest banks in the coming weeks. The Federal Reserve has used previous reports to highlight the pandemic as well as last year’s interest in “meme” stocks such as GameStop and AMC Entertainment.

In a statement, Fed Governor Lyle Brainard also cited recent volatility in commodity markets as a place for potential risks. While volatility in the energy market has grabbed the headlines for several weeks now, there have been other commodity markets — particularly those for industrial metals such as nickel, zinc, and lithium — that have seen significant swings.

According to the technical analysis of the pair: Ahead of the announcement of US inflation figures, which affect the course of global financial markets. There is no change in my technical view for the price performance of the EUR/USD currency pair, as the general trend is still bearish. A breach of the 1.0500 support will increase the bears’ control over the trend, thus moving towards stronger support levels and the closest ones after that are 1.0435 and 1.0300, respectively. As I mentioned before, continuing weaknesses – divergence in economic performance, the future of central bank policy tightening and the Russo-Ukrainian war – support the current trend. On the upside, without breaching the resistance levels 1.0795 and 1.1000, the general trend for EUR/USD will remain bearish.