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Two highly significant economic indicators for the US were released with their values in February. It consists of two components: inflation and the state of the labor market (nonfarm payrolls). In January, payrolls increased by 534 thousand while inflation fell by 0.1%. What do these data indicate, and what can we anticipate the Fed to do at its upcoming meetings?
Many analysts were certain that the United States' cycle of interest rate increases was about to come to an end for the whole month of January. Some have even predicted that the Fed will decline to raise rates at its very first meeting in 2023. It became generally known that the market is waiting for no further increases when it was revealed that it had grown by 0.25%. The inflation figures, which showed a drop for six straight months, supported this. But the most recent report (for January), which was just made public, showed a drop of just 0.1% to 6.4% y/y. I think the disinflation process is slowing down, which could impact the FOMC members' outlook. One month is not particularly frightening. However, if, for instance, the February report also reveals a minor slowdown, this will be cause for concern. In this situation, the Fed might opt to tighten monetary policy more than just once or twice. Let me remind you that the Fed is essentially no longer dealing with the economic problem, and it was decided right away to sacrifice the economy in favor of price stability. In this situation, it is clear that the FOMC will keep trying everything in its power to get back to the target level.
What about the labor market? The most recent nonfarm payroll data showed that it is in good shape. Additionally, the unemployment rate decreased to 3.4%, which is the lowest it has ever been in the previous 50 years. It appears that the Fed has an infinite range of options. It is not an issue if you need to increase the rate multiple times because of how the labor market and economy are currently functioning. In any case, the most recent GDP data was similarly positive. Additionally, the previous one. The economy is expanding once again, jobs are being created often, and unemployment is at a 50-year low. With such a bundle of introductory materials, you can increase the rate to at least 6%.
Analysts are cautious individuals, though, and the majority currently anticipates two additional interest rate increases this year, according to a Reuters survey. Since wages and services will increase in line with the labor market, which will accelerate inflation once more, economists point out that a strong labor market only works against a decline in inflation. We can therefore conclude that the Fed would even profit if the labor market decreased significantly and the labor shortage decreased. Therefore, if nothing else, the rate may increase more frequently than anticipated. In 2023, lowering the rate is not an option. This factor may sustain the demand for US currency in the long run.
I draw the conclusion that the upward trend section's development is finished based on the analysis. As a result, sales with targets close to the predicted level of 1.0350, or 261.8% Fibonacci, can now be taken into consideration. However, almost for the first time in recent weeks, we notice on the chart a picture that can be termed the start of a new downward trend segment. The likelihood of an even bigger complication in the upward trend segment still exists.
The development of a downward trend section is implied by the wave pattern of the pound/dollar pair. Currently, sales with targets at the level of 1.1508, or 50.0% Fibonacci, might be taken into account. The peaks of waves e and b could be used to place a Stop Loss order. Wave c may take a shorter form, but I expect it to drop another 200-300 points for the time being.
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