- Following the Fed’s 25 basis points cut, the EUR/USD pair has decreased, with forecasts suggesting an additional 50 basis points cut by year’s end.
- Powell highlighted that inflation is “slightly rising,” and that labor demand has “softened,” but he dismissed the idea of widespread support for a 50 basis points reduction.
- The ECB has indicated a halt to the relaxation cycle while maintaining an optimistic long-term outlook for the EUR/USD.
The Euro (EUR) took a downturn against the US dollar (USD) on Wednesday after the Federal Reserve’s 25 basis points cut. Following a rally that pushed the pair to yearly highs of 1.1918, traders took profits, leading to a drop of approximately 100 pips, bringing the EUR/USD down to 1.1812, a decline of 0.48%.
The euro dips from a peak of 1.1918 as Powell suggests a cautious approach
The Federal Reserve noted an increased risk to the labor market, acknowledging low unemployment levels, though they have risen. This policy decision wasn’t unanimous, as Governor Stephen Milan voted for a more aggressive 50 basis points cut, aligning with some analysts’ expectations.
Regarding inflation, the Fed remarked that price pressures were “increasing” and that economic growth has slowed through the first half of 2025.
The Economic Forecast Summary (SEP) pointed towards a potential additional 50 basis points rate cut by the year’s end.
In his remarks, Fed Chairman Jerome Powell characterized labor demand as “softer” while noting a “slight increase” in inflation. He observed that the balance of risks is “shifting,” warning that the labor market is “not solid,” but reiterated that the monetary policy is positioned to respond as needed.
Powell addressed speculation about a significant move, downplaying it and stating, “there is no broad support for today’s 50 basis points cut,” emphasizing that the Fed is not rushing to relax its policy.
On the other side of the Atlantic, recent inflation figures suggest that the European Central Bank (ECB) has reaffirmed its decision to maintain the current settings, indicating the end of the easing cycle. As a result, the interest rate differential between the US and the eurozone might narrow significantly in the near future.
Market Overview: EUR/USD declines despite Fed’s signals of future cuts
- The Fed’s Economic Forecast Summary (SEP) could soon influence the direction of the Fed’s funding rate as we approach year-end and into 2026. Currently, traders anticipate a closing rate in December 2026 to be around 125 basis points, within the 3%-3.25% range.
- August data from the US economy showed mixed results. Home sales dropped 8.5% month-over-month, which is a reversal from a 3.4% profit reported in July, marking the lowest level since May at 1,007 million units. Building permits also fell by 3.7%.
- On a brighter note, retail sales surpassed expectations, increasing by 0.6% month-over-month compared to forecasts of 0.2%. The control group used for GDP calculations also saw a month-over-month rise of 0.7%, following a previous increase of 0.5%.
- In the Eurozone, the Harmonized Index of Consumer Prices (HICP) for August fell to around 2%, down from 2.1% in July. Core HICP remained steady at 2.3%.
- The US Dollar Index (DXY), which measures the USD’s performance against a basket of six currencies, is up by 0.38% at 97.03.
- Fitch Ratings expects the Fed to implement a 25-point cut in September and two more in December, with three additional cuts anticipated in 2026. Meanwhile, it doesn’t foresee any further easing from the ECB.
Technical Outlook: EUR/USD hovers around 1.1800 post-Fed decision
The EUR/USD pair may build on bullish momentum as it nears the 1.1900 mark. The relative strength index (RSI) is rising but remains below overbought levels.
A breakout above 1.1900 could open the way to 1.1950 and the psychological level of 1.2000. Conversely, if it dips below 1.1850, the annual highs of 1.1829 and 1.1800 will be in play, targeting the 20-day moving averages at 1.1750 and 1.1704.
