- The EUR/USD currency pair jumped to its highest level in three weeks at the resistance level of 1.1189 following a larger-than-expected US interest rate cut.
- Moreover, its gains were short-lived as the US dollar recovered and the EUR/USD settled around 1.1110 at the time of writing this analysis.
The Federal Reserve cut US interest rates for the first time in 4 years
In an official announcement, the Federal Reserve lowered the target range for the federal funds rate by 50 basis points to 4.75%-5% in September 2024, marking the first reduction in borrowing costs since March 2020. While the rate cut decision was expected, there had been speculation over whether the US central bank would opt for a more conservative 25 basis point cut instead. The Fed also released new economic projections. Policymakers are factoring in 100 basis points of easing by the end of the year, suggesting two more 25 basis point cuts this year.
Additional cuts of 1% are expected in 2025, followed by a final 50 basis point cut in 2026. The personal consumption expenditures price index was also revised downward for 2024 to 2.3% (from 2.6% in June forecasts) and 2.1% for 2025 (from 2.3%). Also, core inflation is expected to decline to 2.6% for 2024 (from 2.8%) and 2.2% for 2025 (from 2.3%). US GDP growth is expected to slow slightly to 2% (from 2.1%), but the forecast for 2025 remained at 2%. Meanwhile, the unemployment rate is expected to rise this year (4.4% vs. 4%) and next year (4.4% vs. 4.2%).
What was expected ahead of the Fed’s decision?
There was good news for both market optimists and dollar pessimists: the upcoming Fed rate decision could be in your Favor, whatever it does. That’s according to Padraic Garvey, head of research at ING. “We have a sneaking suspicion that we might see a ‘surprise’ reaction with higher market rates to whatever the Fed does. That’s happened before. In fact, it works about 50:50 on the reaction function historically,” the analyst said.
The rough evidence suggests that a 25bp cut would disappoint markets, which are generally preparing for a stronger 50bp cut. Thus, that would put pressure on stocks and send the dollar lower. However, a 25bp cut coupled with guidance for a 50bp cut before the end of the year would boost stocks and send the dollar lower. Conversely, a 50bp rate cut with cautious guidance on future cuts could have the opposite effect.
Nonetheless, why does the ING analyst suspect this could be profitable for equity speculators? "All the excitement is before the game. Then delivery brings a sense of new reality to the equation, which can see a higher tactical adjustment as an impact, even if it's no more than a structural glitch as prices ultimately test a lower low in subsequent weeks."
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EUR/USD Technical analysis and forecast:
After the Fed decision, EUR/USD could maintain its upward momentum. As we mentioned before, the 1.1200 resistance will continue to provide further positive momentum for bulls to control the trend. On the other hand, according to the performance on the daily chart, a move towards the 1.1020 and 1.0880 support levels will be important for the upside to evaporate. Ultimately, Financial markets and investors will continue to assess the Fed’s statements and the future frequency of US interest rate cuts or not.
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