EUR/USD BREAKS LOWER PRIOR TO FED MEETING

• EUR/USD descends into mid 1.0800s ahead of Wednesday’s key Fed meeting. 
• Speculation is mounting that the Fed could alter how many interest rate cuts it expects to make in 2024. 
• ECB Vice-President De Guindos sees services inflation still too high for a rate cut.
   

EUR/USD declines by five hundredths of a percent into the mid 1.0800s on Tuesday, before the big event of the week in Forex, the Federal Reserve’s (Fed) March meeting policy announcement. 

Although the Fed is not expected to change its interest rates at the meeting, there is a chance it could change its accompanying statement and forecasts. This could alter the outlook for interest rates and therefore the US Dollar (USD) valuation. 

Interest rates, set by central banks, are a key driver for foreign exchange markets.  Higher interest rates tend to support a currency by attracting greater inflows of foreign capital with the opposite being the tendency for lower rates. 

EUR/USD weakens as investors monetary policy expectations change 

EUR/USD downside over recent days has mainly been driven by renewed US Dollar strength, on the back of a combination of rising expectations there will be a delay in the Fed cutting interest rates and that there may be fewer cuts overall in 2024. 

Speculation is mounting that the Federal Reserve will revise the forecasts in its accompanying notes to the meeting, the Summary of Economic Projections (SEP). In the previous SEP, Fed officials forecast three 25 basis points (0.25%) rate cuts in 2024 but some analysts now think there is a material risk that this could be revised down to two 25 bps cuts to reflect inflationary pressures remaining elevated. A revision down to two cuts could pressure EUR/USD lower. 

“The summary of economic projections will be updated and contains hawkish risks in our assessment with the committee potentially projecting fewer cuts in 2024,” says David Doyle, head of economics at Macquarie, in a note about the Fed meeting. 

The market continues to see June as the first month when the Fed is more likely than not to make its first interest rate cut, but over the last few days July has gained in popularity. Current market-based probabilities, based on the CME FedWatch Tool, favor one or more cuts by June with a 55.1% chance, and by July with a 73.7% probability. The June figure has been trending down. 

“Our view on FOMC policy remains that the first 25 bps cut will occur in July,” says Macquarie’s Doyle. “ In 2024 we anticipate 50 bps of cuts and a further 50 bps in 2025,” he adds.