EUR/USD roils as Fed delivers caution-laden interest rate cut

EUR/USD lurched into intraday highs near 1.1670 after the Fed delivered a widely anticipated interest rate cut.
Price action quickly reversed course after Fed Chair Powell's cautious appearance.

Joshua Gibson FXStreet

EUR/USD caught a volatile bullish swing on Wednesday after the Federal Reserve (Fed) delivered a third straight interest rate cut. The Fiber pair tested its highest intraday bids in nearly a week before slumping back into the day's midrange after a cooler-than-expected appearance from Fed Chair Jerome Powell.

Fed Chair Powell delivered a cautious press conference following the Fed's rate call, noting that a third straight interest rate cut leaves the Fed in a "comfortable" position to play wait-and-see for further data before making any firmer decisions on rate moves moving forward. Despite a widening in the Fed's dot plot of interest rate expectations, FOMC rate forecasts remain largely unchanged from the previous iteration, with the median policymaker expecting only a single rate cut in 2026 and a follow-up trim in 2027 before rates normalize near their long-term level around 3.0%.

The Federal Open Market Committee (FOMC) voted nine-to-three to deliver another quarter-point interest rate cut, with one policymaker preferring a 50 basis-point trim and two voters opting for no cuts at all. It is the first time since 2019 that at least three FOMC policymakers voiced outright opposition to an interest rate cut consensus since 2019.

EUR/USD 5-minute chart

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Author

Joshua Gibson

FXStreet

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.