Federal Reserve Expected to Lower Policy Rate
- Revised Summary of Economic Projections and Fed Chairman’s Remarks Key
- US Dollar Faces Two-Way Risk Based on Interest Rate Cut Size
The upcoming US Federal Reserve meeting in September is highly anticipated by market participants as the central bank is expected to announce its monetary policy decisions and release the revised Summary of Economic Projections (SEP). While a policy rate cut is widely expected, the size of the cut remains uncertain, leading to potential volatility in the markets.
Market Expectations
The CME FedWatch Tool indicates a 60% probability of a 50 basis points (bps) rate cut and a 40% chance of a 25 bps reduction. This uncertainty in market positioning suggests that the US Dollar (USD) could experience fluctuations depending on the actual rate cut decision.
Recent Economic Data
Recent reports, such as the core Consumer Price Index (CPI) and Producer Price Index (PPI), have influenced market expectations. The CPI increase in August exceeded expectations, leading to a reduced chance of a large rate cut. Additionally, the decline in the PPI indicated a shift in market sentiment towards a 50 bps rate cut, impacting the USD’s valuation.
Expert Insights
Analysts from TD Securities anticipate a 25 bps rate cut and emphasize the significance of the dot plot in the Fed’s guidance. Chair Powell’s post-meeting press conference is expected to provide further clarity on the Fed’s forward guidance, potentially leaning dovish.
Impact on EUR/USD
The Fed’s interest rate decision and the subsequent SEP release on September 18 could significantly affect the EUR/USD exchange rate. A 25 bps rate cut may boost the USD initially, while a 50 bps reduction could weaken the currency. The dot plot projections and Chair Powell’s remarks will play a crucial role in determining the USD’s direction.
Technical Analysis for EUR/USD
EUR/USD has shown bullish momentum, with key resistance levels at 1.1200, 1.1275, and 1.1360. On the downside, support levels are at 1.1090-1.1080 and 1.1000-1.0980. Technical indicators suggest potential price movements based on these levels.
Understanding the US Dollar
- USD as Global Reserve Currency: The US Dollar is the most traded currency globally, accounting for a significant portion of foreign exchange transactions.
- Impact of Monetary Policy: The Federal Reserve’s monetary policy decisions, including interest rate adjustments, influence the USD’s value.
- Quantitative Easing and Tightening: Fed’s unconventional policies like QE and QT can impact the USD’s strength or weakness.
By analyzing the Fed’s actions and economic indicators, investors can make informed decisions regarding their portfolios and currency trades. The upcoming Fed meeting will provide valuable insights into the future direction of the USD and global markets.