After the expected 25-basis-point hike, the Federal Reserve signaled a rate pause and removed language suggesting further policy tightening in its announcement. While the banking sector has improved since March, investors are uncertain about the mild recession projected by the Fed, although Chair Jerome Powell expects modest economic growth this year. Though rates may be restrictive enough, achieving the 2% inflation target won’t be a simple process. What’s next for the markets?

Inflation data is crucial

The Fed is committed to reducing inflation to 2%, making next week’s inflation print critical. If it’s much higher than expected, markets might expect another rate hike. Although interest rate markets believe the Fed’s final rate hike is done, high inflation data could negatively impact stocks and boost the USD.

Labor data is significant

The tight labor market is a critical concern for Powell, making today’s jobs data important. Any signs of a drop-off in the jobs market would be taken as a signal that the Fed’s rate hikes have worked. Large jobs miss would boost gold markets, which are threatening to break out of recent highs.

Regional banking concerns

The Fed statement affirms that the US banking system is sound and resilient, but further signs of bank stress could concern investors.

Looking ahead, inflation, labor, and regional US banking news will remain crucial. The Fed has now paused and moved to a meeting-by-meeting basis, but investors will keep a close eye on these three factors to anticipate the Fed’s next move.

The EURUSD is sitting at a key support zone, so buyers will need to win this battle to keep the EURUSD moving higher from a technical perspective. However, remember that Euro longs on the COT report are in a very stretched long position, which makes more upside an uphill struggle unless the ECB turns super hawkish.