EURUSD is under pressure as hopes of an early rate drop from the Fed fade.
Following last week’s warmer thanexpected US inflation statistics, the EURUSD fell and is now trading within a new range around the 1.0800s, increasing the likelihood. That the Federal Reserve (Fed) will need to keep interest rates higher for longer.
Because higher interest rates attract more foreign capital inflows. This was favorable for the US Dollar (USD). But bad for EURUSD. Which measures one Euro’s purchasing power. Power in USD terms.
EURUSD traders prepare for the Fed meeting on Wednesday.
The EURUSD is expected to witness increased volatility on Wednesday. When the Fed closes its March meeting, announces its policy decision. And releases its Summary of Economic Projections (SEP). The Fed is unlikely to announce a rate cut during the meeting. Despite the fact that it was considered a possibility a few weeks ago.
“The reality is setting in that the Fed will take its time,” says Mark Cranfield, an economist at Bloomberg MLIV.
The CME FedWatch Tool. Which analyzes the market-based likelihood of the Fed cutting interest rates, supports his opinion. At the time of publishing, there is a 58% chance that the Fed will make one or More cutbacks of 0.25% are planned for June, followed by 76.5% in July. This is down from the tool’s initial estimate of 80% for June.
According to Bloomberg, the Fed’s dot plot from Wednesday’s meeting could indicate a change from three to two cuts this year.
The Fed’s board of governors forecast at least three 0.25% interest rate reduction in 2024 in their “dot plot” in September, but Bloomberg News reports that there is now a considerable likelihood that this may be reduced to merely two cuts after the March meeting. According to Cranfield, such a retrenchment would be considered “very aggressive.” As a result, the EUR/USD is likely to lose further ground.
“A pleasant surprise would be if the Fed were to maintain three dot-plot cuts,” noted Cranfield. Who supports maintaining the status quo. would be bearish for the USD (bullish for EURUSD).
According to a survey released by Bloomberg on Monday. After analyzing over 900 headlines quoting Fed officials since the beginning of the year. July is more likely to be the month when the Fed begins easing than June.
If this is the case, market expectations will need to shift farther away from June. Which will have a negative impact on the EURUSD, all else equal.
There is little big data available for the Eurozone on Monday. The February Consumer Price Index data is a revision of an estimate. And is unlikely to differ from the preliminary results of 2.6% for headline and 3.1% for Core.
