08.02.2023 10:42 AM
Fed is ready to revise peak interest rate forecast because of labor market

Euro continues to slump as risk appetite declined after Fed officials made another hawkish comment on Tuesday. Minneapolis Fed President Neel Kashkari said the explosive growth in jobs this January indicates that the central bank still has a lot of work to do as it is becoming increasingly difficult to get inflation back to 2.0%.

In short, interest rates will continue to rise and it is likely that it will peak at 5.4% instead of the previously expected 4.75%. Kashkari said they have a target and they know that raising rates can curb inflation, but it is not enough yet so they need to aggressively raise rates and cool the labor market to see a serious impact on the overheated economy.

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On Friday, the US Department of Labor reported that non-farm payrolls rose by 517,000 in January, almost triple the economists' expectations. It is the largest growth in the first month since 1946, not to mention it came despite the attempts of the Fed to use higher interest rates to correct the situation. Officials have repeatedly noted that there is an imbalance in the labor market with supply and demand. Average hourly pay also rose 4.4% in January.

Kashkari's statement that rates should be raised to 5.4% puts him in a more aggressive position compared to his fellow policymakers, who indicated in December that they see the peak at around 5.1%. The Fed has raised the benchmark federal funds rate eight times after inflation reached its highest level in more than 40 years. The most recent increase took place last week, which was by a quarter of a percentage point, the smallest since the policy tightening cycle began. However, inflation, although falling, is still well ahead of the Fed's target. Thus, policymakers continue to signal further increases at upcoming committee meetings. An example of this is Atlanta Fed President Raphael Bostic, who made a similar suggestion a day earlier.

Talking about the forex market, there is quite a lot of pressure on EUR/USD as no one believes that the ECB will be able to maintain its hawkish policy. To stop the bear market, traders must keep the quote above 1.0720. That will spur a rise to 1.0770 and possibly, to 1.0800 and 1.0830. In case of a decline below 1.0720, pressure will increase, which will lead to a further fall to 1.0680 and 1.0650.

In GBP/USD, the sideways trend remains, so buyers need to push the quote above 1.2070 to regain their advantage. Only the breakdown of this resistance will push the pair to 1.2140, after which it will be possible to head towards 1.2200. But in the event that pressure returns and bears take control of 1.2010, the pair will plunge to 1.1950 and 1.1880.

Jakub Novak,
Analytical expert of InstaForex
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