The EUR/USD currency pair experienced a period of oscillation between modest gains and losses on Wednesday, establishing a trading range in the upper 1.0800s. This movement followed a rebound from Tuesday’s lows of 1.0830, propelled by growing sentiments regarding a potential interest rate cut by the Federal Reserve (Fed) before June.
Interest rates, wielded by central banks, serve as pivotal determinants in foreign exchange markets. A decrease in interest rates typically leads to currency depreciation, as it diminishes the allure for foreign capital inflows, while higher rates attract more capital.
The EUR/USD rebounded marginally ahead of the Federal Reserve’s March Federal Open Market Committee (FOMC) meeting, the results of which are slated for announcement at 18:00 GMT. Increasing speculations of an impending interest rate cut by the Fed, currently set at 5.25%-5.50% for the Fed Funds Rate, have bolstered the currency pair.
According to the CME FedWatch Tool, which analyzes Fed Fund Futures to gauge future alterations in the Fed Funds Rate, the probability of a rate cut by June stands at 64.0%, escalating to 78.9% by July. These figures mark a notable uptick from Tuesday’s probabilities of 55.1% and 73.7%, respectively, underscoring the evolving market sentiment that may have contributed to the EUR/USD’s recovery.
While the Fed is not anticipated to adjust interest rates during its meeting, there remains speculation that revisions to its quarterly forecasts and accompanying statements could influence the outlook for interest rates and consequently impact the valuation of the US Dollar (USD).
Potential volatility looms for the EUR/USD post-Fed meeting, with conjecture mounting over potential alterations to the Summary of Economic Projections (SEP) and the “dot plot,” reflecting the Fed’s collective outlook on future rate trajectories. Analysts suggest a possibility of revising down the previously forecasted three 25 basis points (0.25%) rate cuts in 2024 to two, given persisting inflationary pressures.
In Europe, a parallel discourse unfolds regarding the timing of interest rate adjustments, with divisions emerging between those advocating for a wait-and-see approach until the European Central Bank‘s June meeting and a dissenting faction favoring an earlier rate cut.
Key figures from the European Central Bank (ECB), including President Christine Lagarde, Chief Economist Philip Lane, and Executive Board member Isabel Schnabel, are scheduled to speak at an “ECB and its Watchers” conference today. Their remarks may offer insights into the ECB’s stance, potentially influencing EUR/USD volatility.
Additionally, ECB Vice-President Luis de Guindos reiterated allegiance with the camp favoring a wait-and-see approach, citing concerns over elevated services inflation. The discourse surrounding interest rate decisions is poised to continue, with further clarity expected from ECB speakers throughout the day.
