- EUR/USD is under pressure amid fading expectations the Fed will cut interest rates early.
- The dot plot from the Fed’s meeting on Wednesday could show a shift from three to two cuts this year, Bloomberg reports.
- Such a change would probably cause more negativity for EUR/USD.
EUR/USD has taken a step lower and is now trading within a new range in the 1.0800s following last week’s warmer-than-expected US inflation data, which increased the probability the Federal Reserve (Fed) will need to keep interest rates higher for longer.
Since higher interest rates attract more foreign capital inflows, this was positive for the US Dollar (USD), but negative for EUR/USD, which measures one Euro’s (EUR) buying power in USD terms.
Monday's macroeconomic data showed flash estimates of February's Harmonized Index of Consumer Prices for the euro area confirmed at 2.6% YoY and 0.6% MoM, and 3.1% YoY for core, with 0.7% MoM, according to data from Eurostat.
The euro area non-seasonally adjusted international Trade Balance in January showed a surplus of 11.4B Euros against 16.8B in December. The seasonally adjusted international Trade Balance revealed a surplus of 28.1B compared to a deficit of 14.3B in December, data from Eurostat showed.
EUR/USD traders prepare for Fed meeting on Wednesday
EUR/USD is likely to see heightened volatility on Wednesday when the Fed concludes its March meeting, announces its policy decision and publishes its Summary of Economic Projections (SEP). It is highly unlikely the Fed will announce a rate cut at the meeting, even though that was a possibility a few weeks ago.
“The reality is justly sinking in that the Fed is going to take its time,” says Mark Cranfield, an analyst at Bloomberg MLIV.
His view is backed up by the CME FedWatch Tool, which calculates the market-based probabilities of the Fed making rate cuts. At the time of publication it is calculating a 58% chance the Fed will make one or more 0.25% cuts by June, and 76.5% by July. This has fallen from the 80% for June registered by the tool at the beginning of the month.
In the last SEP, the board of governors of the Fed predicted at least three 0.25% interest rate cuts in 2024 in their “dot plot”, however, Bloomberg News says there is now a material possibility that this will be reduced to only two cuts after the March meeting. Such a retrenchment would be viewed as “quite aggressive,” according to Cranfield. As such it would be likely to lead to further weakness for EUR/USD.
“A pleasant surprise would be if the Fed were to maintain three dot-plot cuts,” added Cranfield, who suggests such a maintenance of the status quo would be bearish for USD (bullish for EUR/USD).
July the new June
A report published by Bloomberg on Monday shows that after digesting over 900 headlines quoting Fed officials since the beginning of the year, the conclusion is that July actually comes out as more likely as the month when the Fed begins easing, rather than June.
If this is so, market expectations will need to shift further away from June, with negative consequences for EUR/USD, all other things being equal.
Technical Analysis: EUR/USD hovers above abyss
EUR/USD finds a temporary support as it extends its correction from the 1.0981 March 8 high.
The depth of the correction brings into question the sustainability of the hitherto dominant short-term uptrend.
Euro vs US Dollar: 4-hour chart
Price is still above the pivotal 1.0867 level of the previous key swing low. This is likely to be a make-or-break level for the trend. Should prices cross below it would shift the balance of probabilities in favor of a reversal of the uptrend.
Such a breakdown would then most probably extend to 1.0795, at the low of the B leg of the prior ABC Measured Move pattern that unfolded higher during February and early March.
Alternatively, if the level holds, the short-term uptrend remains intact and likely to resume. Confirmation of a higher high and an extension of the uptrend would come from a break above the 1.0981 highs.
After that, tough resistance is expected at the 1.1000 psychological level – a likely bloody battlefield for bulls and bears.
A decisive break above 1.1000, however, would open the gates to further gains towards the key resistance level at 1.1139, the December 2023 high.
A “decisive” break is one characterized by a long green candle piercing clearly above the level and closing near its high, or three green bars in a row, breaching cleanly above the level.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck 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 in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens 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 principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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