Federal Reserve Set for Potential Rate Cut; Market Awaits Key Insights from Updated Projections and Powell’s Remarks

The Federal Reserve is expected to lower the policy rate after its September meeting, but the size of the cut remains uncertain. Along with the rate decision, the Fed will release the updated Summary of Economic Projections (SEP) and Fed Chair Jerome Powell’s remarks, which are expected to provide key insights into the future of interest rates. Market participants are currently pricing in a near 60% chance of a 50-basis-point (bps) rate cut, while the odds of a 25-bps cut stand at roughly 40%.

The US dollar faces significant risk in both directions depending on the rate cut. If the cut is larger, it may put downward pressure on the dollar, while a smaller cut could provide some support. Last week’s report from the Bureau of Labor Statistics showed the core Consumer Price Index (CPI) rose by 0.3% in August, slightly above the 0.2% expected, signaling stronger inflation and reducing the likelihood of a large rate cut.

An article published on September 12 by Wall Street Journal reporter Nick Timiraos, regarded as a “Fed insider,” suggested that the size of the September rate cut remains a close call. At the same time, producer inflation, measured by the Producer Price Index (PPI), dropped from 2.1% to 1.7% in August, prompting markets to lean toward a 50 bps cut and applying renewed selling pressure on the US Dollar.

According to analysts from TD Securities, the Fed is expected to begin its easing cycle with a 25 bps cut, though they acknowledge it could still go either way between 25 and 50 bps. They note that the dot plot and Powell’s post-meeting comments will likely be the most crucial aspects of the Fed’s guidance, with the overall tone expected to lean dovish.

The Fed’s interest rate decision is set for Wednesday, September 18, at 18:00 GMT, followed by Powell’s press conference at 18:30 GMT. A 25 bps cut could strengthen the US dollar, while a 50 bps reduction may weaken it. The updated dot plot will also play a significant role in influencing market reactions, as it could signal further rate cuts before the year’s end.

In June’s dot plot, four out of 19 Fed officials projected no cuts in 2024, while seven anticipated a 25 bps cut and eight foresaw a 50 bps cut. If the new dot plot indicates the policy rate could end the year 100 bps lower than the current level, even a 25 bps cut could lead to more USD pressure, suggesting two additional cuts in November and December. If the dot plot points to only two more 25 bps cuts, the dollar could gain strength.

Powell’s comments during the press conference will also be closely watched. If he indicates that the decision was a close call with some officials supporting a larger cut, the USD could face difficulties holding its ground. Powell’s tone on economic growth will further shape the market’s outlook—if he expresses concerns about a possible recession, the USD could see demand as a safe-haven currency.

In essence, the Fed’s September meeting is packed with potential volatility, and investors may hold off on taking large positions until the market settles.

When is the Fed Expected to Reveal Its Interest Rate Decision and What Impact Might It Have on EUR/USD?

The EUR/USD pair is showing signs of a bullish shift, with its RSI moving towards 60, indicating growing buyer interest. After five consecutive days below the 20-day Simple Moving Average (SMA), the pair has rebounded above it, signaling renewed upward momentum.

Key resistance levels to watch include 1.1200, marking the end of the July-August uptrend, followed by 1.1275 (the July high) and 1.1360, a significant level from January 2022. On the downside, the 1.1090-1.1080 zone, supported by the 20-day SMA and the 23.6% Fibonacci retracement, is crucial. A drop below this could lead to further declines toward the 1.1000-1.0980 range (38.2% Fibonacci retracement and 50-day SMA) and possibly 1.0940.

In a bullish scenario, a break above 1.1200 could push EUR/USD higher towards 1.1275 and 1.1360. Conversely, if support at 1.1090-1.1080 fails, the pair could decline to 1.1000-1.0980 or even 1.0940, signaling a potential shift toward bearish momentum.