Nightmare for the Fed: Will Jerome Powell follow the path of Paul Volcker?

RBA Pauses Rates as Australian Dollar Slides; ISM Manufacturing PMI in Focus

Relevance up to 09:00 2022-06-14 UTC+2 Company does not offer investment advice and the analysis performed does not guarantee results. The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

While the euro and the pound are failing again, losing every minute against the US dollar, Federal Reserve Chairman Jerome Powell has no less problems, and maybe even more. The latest inflation figures in the US are forcing the head of the Fed to act further aggressively, which will force him to further push the economy into recession—there are no other ways for the committee to take control of prices.


Exchange Rates 13.06.2022 analysis


For most of the past year, Powell has been saying that inflation is temporary and that everything is under the complete control of the central bank. Now that things are out of control, Powell has taken on the role of inflation fighter in the style of Fed icon Paul Volcker. We are likely to hear quite a lot of tough statements this Wednesday about the need to fight high prices and that the Fed is ready to completely do away with this problem. It is expected that on Wednesday the Fed will once again raise interest rates by 0.5%.

All this leads and will lead to further strengthening of the US dollar. There is no more hope that risky assets will gradually regain their lost strength. It is obvious that none of the managers intends to sit on the sidelines anymore, complaining that inflation is growing only in volatile categories, while the underlying index is not as bad as it might seem. As recent data have shown, this is far from the case.

Many experts believe that at the next meeting, Powell will take the position of a supporter of a tighter monetary policy, following the example of former Fed Chairman Paul Volcker, who was forced to push the economy into recession in order to reverse the cycle of rising prices. In a recent interview, Powell acknowledged that controlling price pressures may take some effort and possibly even rising unemployment.

Rising inflation is not only hurting the economy and the population, but also politically fraught, especially for President Joe Biden's Democratic Party ahead of the midterm elections this November. A growing number of economists, including former Fed Vice Chairman Blinder, say it may take an economic downturn and higher unemployment to bring inflation down to more bearable levels, much less return to the Fed's 2% price target. This is not the best scenario for the Democrats, who are already criticized for bringing the economy to such a state.


Exchange Rates 13.06.2022 analysis


Almost all leading economic agencies now believe that inflation stabilization without turning the economy into recession is no longer possible. A prolonged period of high inflation and a strong labor market will continue to lead to higher wage requirements and higher costs for companies, which will only drive up costs, thereby spurring inflation and reducing profits.

As we can see on the charts, all this does not add much optimism to the buyers of risky assets. It is obvious that traders continue to bet on the strengthening of the US dollar, the attractiveness of which is only growing along with the growth of yields on US bonds.

As for the outlook for the euro, if you look at the chart, you can clearly see how the trend is broken. Sellers' only target right now is this year's lows. However, there is obviously hope for building a bull market. It is very important to show something around 1.0460 and 1.0420—levels that are the last hope of buyers for the formation of the lower boundary of a new medium-term upward trend in the euro. Having missed 1.0460, you can say goodbye to hopes for further growth of the pair, which will open a direct road to 1.0420 and 1.0390. A breakout of these support levels will certainly increase the pressure on the trading instrument, opening up an opportunity to test 1.0350 and 1.0306. It is possible to talk about purchases and attempts by the bulls to correct the situation, but only after an obvious return above 1.0500 with an increase of 1.0540 and 1.0580.

Buyers of the pound clearly have a lot more problems than they used to. In the short term, the bulls will certainly count on going beyond 1.2320, which will increase the growth of the trading instrument. A break of 1.2320 will lead to an immediate push to 1.2370 with the prospect of an update of 1.2410 and 1.2460. Also, the bulls should think about what they will do if the bears break below 1.2240 and hit 1.2200. Going beyond this range will lead to another downward movement already to the annual lows: 1.2160 and 1.2120.


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RBA Pauses Rates as Australian Dollar Slides; ISM Manufacturing PMI in Focus

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