- The Federal Reserve is expected to leave the policy rate unchanged for the second consecutive meeting.
- The revised Summary of Economic Projections could offer key clues about the policy outlook.
- The US Dollar could recover if the Fed downplays growth concerns.
The United States (US) Federal Reserve (Fed) will announce monetary policy decisions and publish the revised Summary of Economic Projections (SEP), the so-called dot plot, following the March policy meeting on Wednesday. Market participants widely anticipate the US central bank to leave policy settings unchanged for the second consecutive meeting, after cutting the interest rate by 25 basis points (bps) to the 4.25%-4.5% range in December.
The CME FedWatch Tool shows that investors virtually see no chance of a rate cut in March while pricing in about a 30% probability of a 25 bps reduction in May. Hence, revised forecasts and comments from Fed Chairman Jerome Powell could drive the US Dollar’s (USD) valuation rather than the interest rate decision itself.
In December, the dot plot showed that policymakers were projecting a total of 50 bps reduction in the policy rate in 2025, while forecasting an annual Gross Domestic Product (GDP) growth of 2.1% and seeing an annual Personal Consumption Expenditures (PCE) inflation of 2.5% at year-end.
“The FOMC is broadly expected to keep its police stance unchanged for a second consecutive meeting,” said TD Securities analysts previewing the Fed event. “Based on the still steady signal provided by the labor market amid still sticky inflation, we expect Chair Powell to double-down on his message of patience regarding policy decisions. We also do not anticipate significant changes to the Fed’s SEP or to QT plans for now,” they added.
When will the Fed announce its interest rate decision and how could it affect EUR/USD?
The US Federal Reserve is scheduled to announce its interest rate decision and publish the monetary policy statement with the revised SEP on Wednesday at 18:00 GMT. This will be followed by Fed Chairman Jerome Powell’s press conference starting at 18:30 GMT.
Disappointing macroeconomic data releases from the US, combined with US President Donald Trump’s tariff announcements, revived fears over the US economy tipping into recession. According to the Federal Reserve Bank of Atlanta’s GDPNow model, the US economy is projected to contract at an annual rate of 2.4% in the first quarter.
In case the dot plot shows a rate cut projection of 75 bps in 2025, this could be seen as a dovish shift in the rate outlook and trigger another leg of the USD selloff. On the flip side, a hawkish revision in the SEP, with officials forecasting a single 25 bps cut, could boost the currency.
If the interest rate projection remains unchanged, investors will scrutinize inflation and growth forecasts. A downward revision to growth expectations could hurt the USD, while an upward revision to inflation forecasts, without a noticeable change in the GDP estimates, could support the USD in the near term.
Powell’s comments could also impact the USD’s performance. If he downplays concerns over an economic downturn and puts more emphasis on the uncertainty surrounding the inflation outlook, citing Trump’s administration’s tariffs, the USD is likely to outperform its rivals in the near term. On the contrary, if Powell acknowledges signs of a worsening growth outlook, the USD is likely to have a difficult time finding demand.
Eren Sengezer, European Session Lead Analyst at FXStreet, provides a short-term technical outlook for EUR/USD:
“EUR/USD remains technically bullish in the near term as it stays in the upper half of the two-month-old ascending regression channel. Additionally, the Relative Strength Index (RSI) indicator on the daily chart holds near 70, reaffirming the bullish stance.”
“On the upside, 1.1000 (upper limit of the ascending channel, round level) aligns as a key resistance level before 1.1100 (static level, round level) and 1.1180 (static level from October 2024). Looking south, the first support level could be spotted at 1.0770 (mid-point of the ascending channel) before 1.0720, where the 200-day Simple Moving Average (SMA) is located. A daily close below the latter support could attract technical sellers and open the door for an extended slide toward 1.0645 (20-day SMA).”
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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