Introduction to the Federal Reserve’s Interest Rate Decision
The United States Federal Reserve (Fed) is set to announce its interest rate decision on Wednesday, and markets widely expect the US central bank to keep the policy rate unchanged in the range of 3.5%-3.75%. This decision is nearly fully priced in, so Fed Chair Jerome Powell’s comments in the post-meeting press conference could significantly impact the US Dollar’s (USD) performance.
Market Expectations and Predictions
The CME FedWatch Tool shows that investors see about a 98% probability of a policy hold in January, and price in a 15% chance of a 25-basis-point (bps) rate cut in March. A recently conducted Reuters poll revealed that all 100 economists surveyed expect the Fed to hold the federal funds rate unchanged in January. Moreover, 58% of respondents forecast no rate changes during the first quarter, compared with December’s poll, when at least one cut by March was anticipated.
Analysis from TD Securities
TD Securities analysts agree that the Fed will keep rates on hold at the 3.50%-3.75% range, arguing that risk-management cuts are now over and the policy is closer to neutral. They add that while Powell is likely to sound noncommittal around near-term rate cuts, he will remind market participants that the median Fed official still looks for easing this year.
Impact on EUR/USD
The Fed is scheduled to announce its interest rate decision and publish the monetary policy statement at 19:00 GMT, followed by Fed Chair Jerome Powell’s press conference starting at 19:30 GMT. The rate decision itself is unlikely to trigger a significant market reaction, but Powell’s tone could influence the USD valuation and drive EUR/USD price action. If Powell adopts an optimistic tone on the inflation outlook and emphasizes the need to support the labor market, investors could see this as a dovish sign, leading to a stronger EUR/USD.
Technical Outlook for EUR/USD
The Relative Strength Index (RSI) indicator keeps near overbought conditions on the daily chart, and EUR/USD holds firm above its 20-day and 100-day Simple Moving Averages (SMA), highlighting a bullish tilt in the short-term technical outlook. On the upside, 1.1918 (September high) aligns as the immediate resistance level ahead of 1.2000 (round level). On the flip side, 1.1821 (Friday’s close) could be seen as the first support level before 1.1760 (static level), followed by 1.1710 (20-day SMA).
Understanding the Federal Reserve
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
The Federal Reserve’s Policy Meetings
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
Quantitative Easing and Tightening
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds.
Conclusion
The Federal Reserve’s interest rate decision is a crucial event that can significantly impact the US Dollar’s performance. With markets widely expecting the policy rate to remain unchanged, Fed Chair Jerome Powell’s comments in the post-meeting press conference will be closely watched. The technical outlook for EUR/USD suggests a bullish tilt in the short-term, but the pair’s performance will ultimately depend on the tone of the Fed’s statement and the market’s reaction to it. As the Fed continues to navigate the complex economic landscape, its decisions will have far-reaching implications for the global economy and financial markets.
