- EUR/USD sees a sharp decline in response to the Federal Reserve’s 25 basis point rate cut, accompanied by a cautious outlook on future policy adjustments.
- Fed Chair Jerome Powell emphasizes a careful approach to future rate changes, pointing to persistent inflation risks and a stable labor market.
- The Fed’s updated economic projections indicate only modest rate reductions in the coming years, setting the federal funds rate target at 3.4% by 2026.
EUR/USD fell sharply after the Fed cut interest rates but also took a slightly hawkish stance, with the central bank estimating a 100 basis point reduction over the next two years. At the time of writing, the pair is trading below 1.0400, volatile.
EUR/USD falls below 1.0400 as Fed Chair Jerome Powell speaks
In his news conference, Powell said the central bank could be more cautious in considering additional tightening, acknowledging that policy is less restrictive. He added that risks and uncertainty around inflation are skewed upward, adding that high inflation is one of the reasons for the adjustment of the dot chart.
Jerome Powell added that it could take a year or two for inflation to reach the 2% target, adding that the labor market is not cooling in a way that raises concerns.
The Federal Reserve cut rates by 25 basis points to the 4.25%-4.50% range, although the decision was not unanimous, as Cleveland Fed President Beth Hammack voted to keep rates unchanged.
The statement changed little since the last meeting, although traders focused on the Summary of Economic Projections (SEP).
The central bank’s monetary policy statement revealed that economic activity continued to expand robustly and acknowledged that labor market conditions had eased. Despite the improvement in employment, Fed policymakers decided to keep the language of “The Committee judges that the risks to achieving its employment and inflation goals are approximately balanced.”
Meanwhile, the SEP showed that officials foresee only two rate cuts in 2025 and 2026, bringing the federal funds rate to 3.4% in 24 months.
EUR/USD Reaction to Fed Chair Powell’s Press Conference
EUR/USD has fallen sharply, breaking the psychological level of 1.0450, extending its losses towards the day’s lows at 1.0410. The pair would continue to trade volatilely, while Fed Chairman Powell speaks. Immediate resistance is seen at the December 13 low of 1.0452, and support at 1.0400. If broken, the next support would be the yearly low of 1.0331.
Euro FAQs
The Euro is the currency of the 19 countries of the European Union that belong to the eurozone. It is the second most traded currency in the world, behind the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of more than $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2 %).
The European Central Bank (ECB), headquartered in Frankfurt, Germany, is the reserve bank of the eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means controlling inflation or stimulating growth. Its main tool is the increase or decrease in interest rates. Relatively high interest rates (or the expectation of higher rates) tend to benefit the euro and vice versa. The Governing Council of the ECB makes decisions on monetary policy at meetings held eight times a year. Decisions are made by the directors of the Eurozone’s national banks and six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), are an important econometric indicator for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, it forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to their counterparts tend to benefit the euro, making the region more attractive as a place for global investors to park their money.
The published data measures the health of the economy and may have an impact on the euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence surveys can influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment, but it may encourage the ECB to raise interest rates, which will directly strengthen the euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest eurozone economies (Germany, France, Italy and Spain) are especially significant, as they represent 75% of the eurozone economy.
Another important data that is published about the Euro is the trade balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a given period. If a country produces highly in-demand export products, its currency will gain value simply from the additional demand created by foreign buyers seeking to purchase those goods. Therefore, a positive net trade balance strengthens a currency and vice versa in the case of a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
