Yesterday, the Federal Reserve increased interest rates for the ninth time in a row. In its statement, the FOMC noted that further rate hikes would not be out of the question, which suggests that the regulator is confident the banking sector crisis would not obstruct its anti-inflation drive.
The FOMC unanimously voted to hike the Fed funds rate by a quarter of a percentage point to a range between 4.75% and 5%, its highest level since September 2007. This is the second straight 25 bps move after a series of aggressive hikes from near zero that started in March 2022. However, investors still interpreted the decision as a sign of impending policy easing, as it is obvious that the US central bank has lost some of its confidence amid the unfolding banking sector crisis.
During his speech, Fed Chairman Jerome Powell said he is committed to restoring price stability. He added that all evidence suggested that the public (i.e investors) was also confident that the Fed would deliver on its promises. "It is important that we sustain that confidence with our actions, as well as our words," Powell said at a press conference after the Fed's two-day meeting.
Clearly, the Fed is convinced that the economy will not be seriously undermined by recent problems in the banking sector. However, judging by the reaction of the stock market, many investors are more pessimistic. What is certain is that the most aggressive cycle of monetary tightening in 40 years could lead to the ongoing banking crisis spiraling out of control. Just because the regulator managed to stop it for a while doesn't mean that by keeping policy tight, some other larger bank won't sooner or later break apart, as was the case with Credit Suisse in Switzerland.
Powell also stressed that the US banking system is strong and resilient, echoing the FOMC post-meeting statement. He also said that the committee is prepared to use all of its tools to maintain stability. The Fed Chairman also acknowledged that the recent bank runs were likely to lead to tighter credit conditions for households and businesses, which would in turn affect economic outcomes.
Fed policymakers have forecasted that rates will be around 5.1% at the end of 2023, unchanged from their median estimate from December's outlook. The median forecast for 2024 rose to 4.3% from 4.1%.
These outlooks show that policymakers remain strongly focused on bringing inflation down to 2%, indicating that they see rising prices as a bigger threat to growth than bank shocks. It also instills confidence that the economy and financial system remain healthy enough to withstand a succession of bank collapses.
On the technical side, EUR/USD bulls have all the chances necessary to extend the upside movement and hit the March highs. To do so, they need to keep the pair above the support at 1.0870, which would allow it to move above 1.0930 later. From there, EUR/USD may climb to 1.0965, aiming for 1.1000. If the pair declines and bulls are idle at 1.080, then traders should wait for the pair to hit the low at 1.0840, or open long positions at 1.0800.
GBP/USD bulls are ready to storm new monthly highs. However, it is yet unclear what direction will the Bank of England take. To keep the initiative, bullish traders should keep the pair above 1.2280 and break above 1.2330. Only a breakout of that area would make a move into the 1.2390 area more likely. Afterwards, the pound sterling could surge towards 1.2450. If GBP/USD breaks below 1.2280, it could then slide down to the low of 1.2220, opening the way towards 1.2180.