- The Federal Reserve is expected to keep interest rates unchanged.
- The statements of the president of the Fed, Jerome Powell, could give important clues about the moment in which the political turn will occur.
- Markets see it as very likely that the Fed will wait until September to lower interest rates.
The US Federal Reserve (Fed) will announce its monetary policy decisions on Wednesday after the meeting held between April 30 and May 1. Market participants are widely anticipating that the US central bank will leave the policy rate unchanged at 5.25%-5.5% for the sixth consecutive meeting.
CME's FedWatch tool shows that markets see very little chance of a rate cut in June. Therefore, investors will examine changes in the language of the statement and comments from Fed Chair Jerome Powell to figure out the timing of the policy turn. According to the FedWatch tool, there is a 30% and 60% chance that the Fed will lower the official interest rate in July or September, respectively.
At the end of 2023, markets expected the Fed to cut the policy rate as early as March. Strong jobs and growth figures for the first quarter of 2024, accompanied by data showing a lack of progress on disinflation, caused investors to change their forecasts towards a policy shift in the second half of the year.
Macroeconomic data released since the December policy meeting showed that consumer price and producer price inflation began to pick up in the first two months of the year. Furthermore, the labor market remained relatively healthy, while activity-related data, such as preliminary PMI surveys, suggested that the US is very likely to avoid a recession.
Ahead of the Federal Open Market Committee (FOMC) meeting, “the FOMC is expected to keep the Fed funds target range unchanged at 5.25%-5.50% next week, with a “Chairman Powell likely more cautious than usual, with a hawkish bias, amid firmer-than-expected inflation data,” TD Securities analysts said.
“For now, the trend is likely to remain upward for longer. We also expect the Fed to announce a preliminary plan to reduce the QT starting in June,” they added.
When will the Fed announce its interest rate decision and how could it affect EUR/USD?
The US Federal Reserve is scheduled to announce its interest rate decision and release monetary policy statement at 18:00 GMT. Chairman Powell will then hold a press conference starting at 18:30 GMT.
In his last public appearance, President Powell noted that the performance of the US economy has been quite solid and stated that restrictive policy needs more time to work. Regarding the strong inflation readings, “the Fed took a cautious approach to not overreact to last year's declines; recent data has not provided further confidence,” he said.
Should Powell confirm there will be no rate cut in June, positioning suggests the impact on the US Dollar (USD) is unlikely to be long-lasting, as CME's FedWatch tool shows markets already pricing in almost 90% the probability that monetary policy will be maintained. Following the March policy meeting, Powell argued that seasonal factors could be behind the strong inflation numbers seen earlier in the year, adding that January and February together have not changed the overall story. If Powell takes a more cautious tone on the inflation outlook and suggests they are still far from considering interest rate cuts, the initial reaction could help the dollar gain strength against its rivals.
On the other hand, the USD could lose interest if Powell recognizes the negative impact of restrictive policy on economic activity, pointing to the disappointing 1.6% annualized growth in Gross Domestic Product (GDP) recorded in the first quarter of the year. If Powell alludes to September as the possible time for the policy turn, US Treasury yields could turn lower and drag the dollar south.
Regarding the possible impact of the Fed's policy decisions on the valuation of the Dollar, “the hawkish tone should be maintained at this week's FOMC meeting. In addition, the current context of persistent inflation and robust growth in the US. should maintain upward pressure on US yields, which in turn would provide support for the Dollar,” BBH analysts note, “we believe that although market easing expectations have tightened violently this month, there is still room “When the market finally capitulates to the Fed, the Dollar should gain more,” they added.
Eren Sengezer, chief analyst of the European session at FXStreet, offers a short-term technical outlook for EUR/USD:
“The Relative Strength Index (RSI) on the daily chart remains slightly below 50 despite the recovery seen in the last two weeks, suggesting that EUR/USD has not yet signaled a bullish reversal. To the upside , the 200-day SMA lines up as key resistance at 1.0800. If the pair breaks above that level and starts using it as support, it could head towards 1.0840 – 1.0860 (100-day SMA). 38.2% Fibonacci retracement of the October-January uptrend) and 1.0950 (23.6% Fibonacci retracement).”
“Strong support lies at 1.0600 (78.6% Fibonacci retracement) before 1.0500 (psychological level, static level) and 1.0450 (uptrend start point).”
Frequently asked questions about the Fed
What does the Federal Reserve do and how does it affect the dollar?
The monetary policy of the United States is directed by the Federal Reserve (Fed). The Fed has two mandates: achieving price stability and promoting full employment. Your main tool to achieve these objectives is to adjust interest rates.
When prices rise too quickly and inflation exceeds the 2% target set by the Federal Reserve, it raises interest rates, increasing borrowing costs throughout the economy. This translates into a strengthening of the United States Dollar (USD), as it makes the United States a more attractive place for international investors to place their money.
When inflation falls below 2% or the unemployment rate is too high, the Federal Reserve can lower interest rates to encourage borrowing, which weighs on the greenback.
How often does the Federal Reserve hold monetary policy meetings?
The Federal Reserve (Fed) holds eight meetings a year, in which the Federal Open Market Committee (FOMC) evaluates the economic situation and makes monetary policy decisions.
The FOMC is made up of twelve Federal Reserve officials: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the eleven presidents of the regional Reserve banks, who serve for one year on a rotating basis.
What is Quantitative Easing (QE) and how does it affect the USD?
In extreme situations, the Federal Reserve can resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a clogged financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed's weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE usually weakens the US dollar.
What is Quantitative Tightening (QT) and how does it affect the US Dollar?
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the capital of the maturing bonds it has in its portfolio to buy new bonds. It is usually positive for the value of the US Dollar.
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.
