- For Wednesday's Asian session, the EUR/USD edge is around 1.0935.
- The Fed is expected to leave interest rates unchanged and will update its rate forecast on Wednesday.
- German parliament approved plans for a massive spending surge on Tuesday.
The EUR/USD pair weakened to nearly 1.0935 during Asian trading hours on Wednesday, putting pressure on a modest US dollar recovery (USD). Traders prefer to wait for bystanders ahead of Wednesday's U.S. Federal Reserve interest rate decision.
US economic data stronger than expected on Tuesday provided some support to the greenback. Data released by the Fed showed a 0.7% increase in U.S. industrial production in February increased by 0.7% compared to 0.3% in January (revised from 0.5%). This reading exceeds the market consensus of 0.2%.
The market is widely hopeful that the US Central Bank will hold the rates steady at its March meeting on Wednesday amidst sustained inflation concerns and economic uncertainty. Press conferences and economic forecast summary (SEP), or “Dot-Plot,” are closely monitored as they may provide more clues about the economic outlook and the US interest rate path.
German parliament approved plans for a massive spending surge on Tuesday, across the pond. This aggressive development could support the shared currency as approval of the plan on Tuesday at Bandetag offers Europe's biggest economy to take over hundreds of billions of euros of pimples to promote investment after two years of contraction.
FAD FAQ
US monetary policy is shaped by the Federal Reserve System. The Fed has two missions. To achieve price stability and promote full employment. The main tool to achieve these goals is adjusting interest rates. When prices rise rapidly and exceed the Fed's 2% target, interest rates rise and borrowing costs for the entire economy. This makes the US dollar (USD) stronger as the US is becoming a more attractive place. If inflation rates fall below 2% or unemployment rates are too high, the Fed may lower interest rates and encourage borrowing.
The Federal Reserve holds eight policy meetings per year, where the Federal Open Market Committee (FOMC) assesses the economic situation and makes monetary policy decisions. The FOMC will feature 12 federal officials – seven members of the Governor's Committee, the chairman of the Federal Reserve Bank of New York, and four of the remaining 11 Regional Reserve Bank presidents, serve a one-year term on a revolving basis.
In extreme circumstances, the Federal Reserve can rely on a policy called Quantitative Liberty (QE). QE is a process that dramatically increases the credit flow in the financial system where the Fed has been stuck. This is a non-standard policy measure used during a crisis or when inflation is very low. This was the weapon chosen by the Fed during the 2008 big money crisis. This includes the Fed printing more dollars and using them to purchase high-quality bonds from financial institutions. QE usually weakens the US dollar.
Quantitative tightening (QT) is the reverse process of QE, with the Federal Reserve halting the purchase of bonds from financial institutions and not reinves principal from mature bonds to buy new bonds. It is usually positive about the value of the US dollar.
