Further Interest Rate Cuts Will Be Necessary

[Ben Graham]

While most officials at the U.S. Federal Reserve continues a more conservative approach, Philadelphia Federal Reserve Bank President Anna Paulson said she sees room for further interest rate cuts this year after the latest inflation data confirmed her cautious optimism.

"I am cautiously optimistic about inflation and see a fairly good chance that we will end the year with inflation close to 2% on a year-over-year basis," Paulson said on Wednesday.

Speaking before the Greater Philadelphia Chamber of Commerce, Paulson noted that core inflation, which excludes volatile food and energy prices, has slowed more than expected in recent months. She emphasized that this trend is an encouraging sign that inflationary pressures are easing and that the Federal Reserve may have room to maneuver in its monetary policy. She added that any decision to cut rates would depend on incoming economic data and would be made on a meeting-by-meeting basis.

Despite her cautious optimism, Paulson stressed that the Federal Reserve must remain vigilant against the risk of a renewed surge in inflation. She believes that geopolitical tensions and supply-chain disruptions could put upward pressure on prices. "I also expect the labor market to stabilize and the economy to grow by around 2% this year. If all of that happens, a small adjustment to interest rates will likely be needed toward the end of the year," she said.

Paulson is one of several policymakers who, following the central bank's December meeting, signaled that they prefer to keep interest rates unchanged for some time in order to gain a clearer picture of the economic outlook. According to projections published in December, this official expects only one quarter-percentage-point rate cut in 2026, following three such cuts in 2025.

According to data released on Tuesday, the annual Consumer Price Index stood at 2.7%. Some Fed officials are concerned that inflation has remained above the 2% target for too long, while others point to weak employment growth and a higher unemployment rate.

"Risks in the labor market have increased, and that was an important factor in my support for the 75-basis-point rate cut carried out by the Federal Open Market Committee last year. I will continue to closely monitor developments in the labor market," Paulson said.

As for the current technical picture of EUR/USD, buyers now need to focus on taking the 1.1650 level. Only this would allow them to target a test of 1.1680. From there, it would be possible to climb to 1.1710, but doing so without support from major players would be quite difficult. The most distant target would be the 1.1740 high. In the event of a decline in the trading instrument, I expect any serious action from major buyers only around the 1.1630 area. If there is no one there, it would be advisable to wait for a retest of the 1.1610 low or to open long positions from 1.1591.

As for the current technical picture of GBP/USD, pound buyers need to take the nearest resistance at 1.3440. Only this would allow them to target 1.3460, above which a breakout would be quite difficult. The most distant target would be the 1.3490 level. In the event of a decline, bears will attempt to take control of 1.3415. If they succeed, a break of this range would deal a serious blow to bullish positions and push GBP/USD toward the 1.3390 low, with the prospect of a move to 1.3370.

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