- EUR/USD fell sharply following the Federal Reserve's 25 basis point interest rate cut and cautious outlook for future policy adjustments.
- Federal Reserve Chairman Jerome Powell has emphasized a cautious approach to further interest rate changes, pointing to persistent inflation risks and a stable labor market.
- The Fed's latest economic forecasts show that interest rate cuts will be modest over the next few years, with the federal funds rate target set at 3.4% by 2026.
EUR/USD fell sharply after the Fed cut interest rates, but also took a slightly more hawkish stance as the Fed estimates 100 basis points of easing over the next two years. At the time of writing, the pair is volatile, trading below 1.0400.
EUR/USD drops below 1.0400 on Fed Chairman Powell's speech
Chairman Powell told a news conference that the policy was not restrictive and said the central bank could be more cautious in considering further adjustments. He added that the risks and uncertainties surrounding inflation are skewed to the upside, and that rising inflation is one reason for the dotplot to adjust.
Chairman Jerome Powell said it could take a year or two for inflation to reach the 2% target, adding that the labor market had not cooled enough to cause concern.
The Fed cut interest rates by 25 basis points to a range of 4.25% to 4.50%, but the decision was not unanimous as Cleveland Fed President Beth Hammack voted to keep rates unchanged.
Traders were keeping an eye on the Summary Economic Outlook (SEP), with the statement largely unchanged from the previous meeting.
The central bank's monetary policy statement revealed that economic activity continues to expand steadily and acknowledged that labor market conditions are easing. Despite the improvement in employment, Fed policymakers decided to maintain language that says, “The Committee determines that the risks to employment and achieving the inflation goal are approximately balanced.”
Meanwhile, SEP revealed that officials decided to cut rates just twice in 2025 and 2026, pushing the federal funds rate to 3.4% in 24 months.
EUR/USD reaction to Fed Chairman Powell's press conference
EUR/USD fell sharply, clearing the psychological level of 1.0450 and extending losses towards the day's low of 1.0410. The pair is likely to remain volatile as Fed Chairman Jerome Powell announces his position. Immediate resistance lies at the December 13 low of 1.0452, with support at 1.0400. If this is cleared, the next support will be the year-to-date low at 1.0331.
Euro Frequently Asked Questions
The euro is the currency of the 19 European Union countries that belong to the euro area. It is the second most traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily trading volume of over $2.2 trillion. EUR/USD is the most frequently traded currency pair in the world, accounting for an estimated 30% of all trades, followed by EUR/JPY (4%), EUR/GBP (3%), and EUR/AUD (2%). ) and so on.
The European Central Bank (ECB), located in Frankfurt, Germany, is the reserve bank of the euro area. The ECB sets interest rates and controls monetary policy. The ECB's main task is to maintain price stability, which means controlling inflation or stimulating growth. The main means of doing so is raising or lowering interest rates. Relatively high interest rates, or expectations of rising interest rates, usually benefit the euro and vice versa. The ECB Governing Council decides monetary policy at its eight annual meetings. Decisions will be made by the heads of the euro zone national banks and the six permanent members of the ECB, including Christine Lagarde, president of the ECB.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric indicator for the euro. If inflation rises more than expected, especially above the ECB's 2% target, the ECB will mandate interest rate hikes to rein in inflation. Relatively high interest rates compared to other countries typically benefit the euro, as it makes the region more attractive to global investors as a place to park their funds.
The data release will gauge the health of the economy and could have an impact on the euro. Indicators such as GDP, manufacturing and services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the euro. This could not only attract more foreign investment but also prompt the ECB to raise interest rates, which could directly lead to a stronger euro. Otherwise, if economic indicators are weak, the euro is likely to weaken. Economic data for the euro area's four largest economies (Germany, France, Italy and Spain) is particularly important, as they account for 75% of the euro area economy.
Another important data regarding the euro is the trade balance. This indicator measures the difference between what a country earns from exports and what it spends on imports over a given period of time. If a country produces highly sought-after export goods, the value of its currency increases purely due to the additional demand generated from foreign buyers seeking to purchase these goods. Therefore, if the net trade balance is positive, the currency strengthens, and vice versa if it is negative.
