The Federal Reserve left the interest rate unchanged at yesterday's meeting in the range of 5.25-5.5% and indicated that it might raise the rate again later this year. Regarding the medium-term perspective (including 2024), the central bank showed a reduced dovish bias to expect a rate cut compared to before. Furthermore, optimism about the 'soft landing of the economy,' a scenario where tight monetary policy would bring inflation back to target levels without causing a recession, has increased, according to the Fed.

Powell, in his speech, stated that the neutral interest rate might be higher than previously assumed and that the increase in market yields, especially long-term ones, is linked to rising inflation expectations. It's clear that these two statements strongly suggest that the period of high interest rates could be prolonged, and even a rate cut in 2024 is in question at the moment. This was certainly a surprise for the markets, which had assumed that the Fed would allow for a rate cut in 2024. Powell also highlighted that growth in certain sectors (likely in the services industry) requires a more restrictive level of rates, which is why an official pause has not been declared yet. The head of the central bank also drew attention to energy prices, stating that if they remain high for an extended period, it could impact all components of consumer inflation, making sustainably high oil prices a risk factor for forecasts. According to Powell, the decisions of the FOMC in the last two meetings of this year will entirely rely on incoming data, so there is no use in making assumptions about future decisions at this point.

The market interpreted the meeting as a hawkish pause, as seen in the strengthening of the dollar against other currencies. EURUSD fell to the level of 1.06 after the Fed meeting, and the dollar index reached a local high of 105.50. The target for the index remains the upper boundary of the ascending channel, which is approximately around 106.20:

Long-term and short-term Treasury yields hit new highs, with the spread between them widening, indicating a stronger sell-off in long-term bonds. Essentially, the market has become more convinced that the plateau the Fed will reach after the tightening cycle may last longer than previously thought:

Gold prices declined on expectations of higher rates, and risk assets also reacted negatively. Yesterday, they closed in the red, and today the decline continued, affecting not only the American market but also European and Asian exchanges. However, there is no sign of disorderly selling.

The British pound tumbled today due to the unexpected decision of the Bank of England to keep the interest rate unchanged, despite recent inflation expectations that seemed to call for action. Out of the 9 members of the central bank's top management, 5 voted to keep the rate unchanged, forcing market participants to sharply revise their rate cut forecasts for the central bank, bringing the first rate cut date closer to September 2024.

Risk-off sentiment in the market was also amplified by U.S. labor market data; the number of initial jobless claims showed a new minimal increase of only 201K, against a forecast of 225K. Since the beginning of August, the increase has been consistently slowing down, and this is a strong argument in favor of the Federal Reserve further tightening its policy:

EURUSD is expected to continue to drift towards the level of 1.05 and a subsequent rebound remains the base case. It's evident that for the market to anticipate a dollar reversal, it needs data indicating a slowdown in the U.S. economy. However, the current data points in the opposite direction: high interest rates have not significantly slowed down activity in the United States.