Financial firms split over the Fed's policy path

[Ben Graham]

While the euro, the pound, and other risk assets rose sharply on reports that the US Department of Justice had opened a criminal investigation into Federal Reserve Chair Jerome Powell, financial institutions' views on the Fed's future policy diverged sharply after the recent release of labor?market data, reflecting uncertainty about the trajectory of the US economy.

Statements by Federal Reserve official Steven Miran calling for a substantial rate reduction in 2026 contrast with more restrained forecasts from Goldman Sachs, which see no reason for urgent action.

Citigroup occupies an intermediate position, arguing that the Fed will begin an easing cycle earlier than expected because the economy is slowing faster than forecast. Morgan Stanley, by contrast, highlighted the Fed's data dependence and warned that a rapid easing of monetary policy is unlikely without serious economic deterioration.

The gap in forecasts reflects differing interpretations of current economic data and outlooks. Miran appears to focus on the restrictive effect of the Fed's current stance on the economy and thus signals a need to support growth. Citigroup likewise sees signs of economic weakness that warrant quicker policy responses.

As noted above, Goldman Sachs and Morgan Stanley adopt a more conservative stance, arguing that the current situation does not require immediate Fed action. Goldman Sachs emphasizes the transitory nature of recent improvements in the jobs market, as shown by Friday's US labor data that put the unemployment rate at 4.4%. Morgan Stanley stresses the need for further analysis of macro data before policy decisions are made.

Overall, financial institutions display a wide range of views on the Fed's path, underscoring the difficulty of forecasting economic developments and the many factors that influence policymakers' decisions. Traders should take these divergent perspectives into account when shaping their strategies.

Regarding the current technical picture for EUR/USD, buyers should now consider reclaiming the 1.1680 level. Only that would allow them to target a test of 1.1705. From there, a climb to 1.1725 is possible, although achieving that without support from major players would be rather difficult. The farthest target will be the high at 1.1740. In the event of a decline, I expect significant buying interest only around 1.1640. If there is no one there, it would be advisable to wait for an update of the low at 1.1619 or to open long positions from 1.1591.

As for GBP/USD, its buyers need to capture the nearest resistance at 1.3435. That would allow a move toward 1.3460, above which a breakout would be challenging. The extended target is the area around 1.3488. Should the pair fall, bears will attempt to seize control at 1.3403. If they succeed, a break of that range would deal a serious blow to bullish positions and could push GBP/USD down to 1.3373, with scope to extend to 1.3341.

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