- The Federal Reserve is expected to leave the policy rate unchanged for the fifth consecutive meeting.
- The statement language and comments from Fed Chair Powell could offer key clues about the policy outlook.
- The US Dollar could weaken in case investors are convinced of a rate cut in September.
The United States (US) Federal Reserve (Fed) will announce its interest rate decision and publish the policy statement following the July policy meeting on Wednesday.
Market participants widely anticipate the US central bank will leave policy settings unchanged for the fifth consecutive meeting after cutting the interest rate by 25 basis points (bps) to the 4.25%-4.50% range last December.
The CME FedWatch Tool shows that investors virtually see no chance of a rate cut in July, while pricing in about a 64% probability of a 25 bps reduction in September. This market positioning suggests that the US Dollar faces a two-way risk heading into the event.
The revised Summary of Economic Projections (SEP), published in June, showed that policymakers’ projections implied 50 bps of rate cuts in 2025, followed by 25 bps reduction in both 2026 and 2027. Seven of 19 Fed officials pencilled in no cuts in 2025, two of them saw one cut, while eight of them projected two and two of them forecast three cuts this year.
Following the June meeting, Fed Governor Christopher Waller voiced his support for a July rate cut in his public appearances, arguing that they should not wait until the labor market is in trouble before easing the policy. Similarly, Fed Governor Michelle Bowman said that she is open to cutting rates as soon as July since inflation pressures remain contained. Meanwhile, United States (US) President Donald Trump extended his attempts to pressure the US central bank into cutting interest rates in July. While addressing reporters alongside British Prime Minister Keir Starmer on Monday, Trump reiterated that the US economy could be doing better if the Fed were to cut rates.
Previewing the Fed meeting, “the FOMC is again widely expected to keep its policy stance unchanged next week, with the Committee maintaining rates at 4.25%-4.50%,” noted analysts at TD Securities. “We expect Powell to repeat his patient, data-dependent policy stance while maintaining flexibility around the Committee’s next move in September. We believe two dissents, from Governors Bowman and Waller, are likely at this meeting.”
When will the Fed announce its interest rate decision and how could it affect EUR/USD?
The Fed is scheduled to announce its interest rate decision and publish the monetary policy statement on Wednesday at 18:00 GMT. This will be followed by Fed Chair Jerome Powell’s press conference starting at 18:30 GMT.
In case Powell leaves the door open for a rate cut in September, citing alleviated uncertainty after the US reached trade deals with some major partners, such as the European Union and Japan, the USD could come under renewed selling pressure with the immediate reaction.
Conversely, the USD could gather strength against its rivals if Powell repeats the need for a patient approach to policy-easing, highlighting sticky June inflation readings and relatively healthy labor market conditions. In this scenario, investors could refrain from pricing in a rate cut in September and wait for new inflation and employment data.
Eren Sengezer, European Session Lead Analyst at FXStreet, provides a short-term technical outlook for EUR/USD:
“The near-term technical outlook points to a buildup of bearish momentum. The Relative Strength Index (RSI) indicator on the daily chart stays below 50 and EUR/USD trades below the 50-day Simple Moving Average (SMA) for the first time since late February.”
“On the downside, 1.1440 (Fibonacci 23.6% retracement level of the February-July uptrend) aligns as the next support level ahead of 1.1340 (100-day SMA) and 1.1200 (Fibonacci 38.2% retracement). Looking north, resistance levels could be spotted at 1.1700 (20-day SMA), 1.1830 (end-point of the uptrend) and 1.1900 (static level, round level).”
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.