EUR/USD slumps as Fed holds rates; Waller and Bowman dissent
- Fed keeps rates steady; two Governors voted for a 25-bps cut.
- Statement flags “elevated uncertainty” and moderate growth in H1.
- EUR/USD trades choppy near 1.1475, eyes key support at 1.1450.
The EUR/USD extended its losses during the North American session, as the Federal Open Market Committee (FOMC) held rates unchanged, in a vote split, that witnessed two Governors, favoring a 25-bps rate cut. At the time of writing, the pair trades volatile at around 1.1475-1.1500, negative on the day.
Euro weakens over 0.50% as Powell’s press conference looms, with markets digesting split Fed vote
Federal Reserve officials noted in the statement that economic activity moderated in the first half of the year, while the unemployment rate remains low and inflation is “somewhat elevated.” Policymakers reaffirmed their commitment to achieving maximum employment and returning inflation to the 2% target, while acknowledging that “uncertainty about the economic outlook remains elevated.”
The statement also confirmed that the Fed will continue reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities. Attention now turns to Fed Chair Jerome Powell’s press conference, scheduled for 18:30 GMT.
EUR/USD reaction to Fed’s decision
The EUR/USD seesawed within the 1.1476-1.1496 range, remaining slightly volatile as traders brace for the Fed Chair Jerome Powell press conference. Nevertheless, the pair remains down by over 0.53% in the day, with key resistance seen at 1.1500, followed by the day’s peak at 1.1572. Further upside lies at 1.1600.
Conversely, if the pair tumbles below 1.1450, this clears the path to 1.1400. On further weakness, the next area of interest would be the 100-day SMA at 1.1350.
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.
Author
Christian Borjon Valencia
FXStreet
Christian Borjon began his career as a retail trader in 2010, mainly focused on technical analysis and strategies around it. He started as a swing trader, as he used to work in another industry unrelated to the financial markets.
