- The Fed remains stable, with two governors supporting a 25 bps cut.
- The statement indicates “increased uncertainty” and moderate growth early this year.
- EUR/USD is set to decline near 1.1475, with main support at 1.1450.
During the North American session, the EUR/USD pair experienced a decline. This was largely influenced by the Federal Open Market Committee (FOMC) where two governors voted for a 25 bps rate cut without any changes to the overall voting dynamics. Currently, the pair is trading around 1.1475-1.1500 and is down for the day.
The euro is expected to drop by over 0.50% as Powell’s press conference nears, reflecting market reactions to the split Fed votes.
Officials from the Federal Reserve noted in their statement that economic activity was tempered earlier this year; however, unemployment remains low and inflation shows signs of slight increase. They reaffirm their goal of achieving maximum employment and returning inflation to a target of 2%, while also recognizing ” high uncertainty about the economic outlook.”
The Fed confirmed they will continue to reduce their holdings of Treasury securities and mortgage-backed securities. All eyes are on Federal Reserve Chairman Jerome Powell, whose press conference is set for 18:30 GMT.
EUR/USD reaction to the Fed’s decision
Currently, the EUR/USD is fluctuating between 1.1476 and 1.1496. The pair is down more than 0.53% for the day, with key resistance observed at 1.1500, followed by a peak at 1.1572. On the higher end, potential resistance is noted at 1.1600.
If the pair dips below 1.1450, it could potentially head towards 1.1400. Further weakness could bring attention to the 100-day SMA, located around 1.1350.
FAD FAQ
US monetary policy is influenced by the Federal Reserve System, which has two main aims: to ensure price stability and promote full employment. The primary method to achieve these objectives is by adjusting interest rates. When prices rise too quickly and surpass the Fed’s 2% target, interest rates increase, making borrowing more expensive and strengthening the US dollar. Conversely, if inflation falls below 2% or unemployment is high, the Fed may lower rates to stimulate borrowing.
The Federal Reserve conducts eight policy meetings annually, allowing the Federal Open Market Committee (FOMC) to review economic conditions and make decisions regarding monetary policy. This committee consists of 12 federal officials — seven members from the Governor’s Committee, the chair of the Federal Reserve Bank of New York, and four of the remaining 11 Regional Reserve Bank presidents on a rotating one-year term.
In specific situations, the Federal Reserve may utilize a policy called Quantitative Easing (QE). This approach significantly increases credit flow in the economy, which can be beneficial during crises or periods of low inflation. The Fed employed this strategy during the 2008 financial crisis by printing more dollars to buy quality bonds from financial firms. Typically, QE leads to a weaker US dollar.
Quantitative Tightening (QT) is essentially the opposite of QE. Here, the Federal Reserve stops purchasing bonds and refrains from reinvesting in new bonds as old ones mature. Normally, this is beneficial for the value of the US dollar.
