The Federal Reserve seems to believe that inflation will remain low based on recent data. Investors are anticipating three 25 basis points rate cuts by January, with the first potentially happening in September. The decision from the Fed will be announced on Wednesday at 18:00 GMT.
After the June FOMC meeting, where interest rate projections were revised downwards, the softer-than-expected CPI numbers for May did not convince the market about the Fed’s intentions. However, subsequent data, including the employment report for June and CPI numbers for that month, have boosted the Fed’s confidence in its path to keep inflation low.
Investors have priced in a quarter-point rate cut for September and expect two more cuts by the end of the year. Fed funds futures are indicating an 80% chance of a third reduction by January. However, recent economic indicators, such as flash PMIs for July and GDP estimates for Q2, suggest that investors’ expectations for rate cuts may be overly dovish.
The upcoming Fed policy meeting will provide fresh clues about the central bank’s future actions. While no policy changes are expected, investors will be closely watching Chair Powell’s statements for hints about a potential September rate cut and the Fed’s plans going forward. Former New York Fed President William Dudley’s change in stance, advocating for a cut at the upcoming meeting, hints at a more dovish tilt compared to the June meeting.
Even if the Fed signals a September rate cut, the dollar may not weaken significantly as this outcome is already priced in. In fact, any indication that a second rate cut this year is uncertain could lead to a dollar rebound. This uncertainty could impact the euro/dollar pair, potentially causing it to resume its downward trend towards key support levels.
For the euro/dollar pair to turn bullish, a decisive close above 1.0945 may be necessary. This could attract buyers and push the pair towards higher resistance levels. Overall, the market is eagerly awaiting the Fed’s decision and any hints about future rate cuts to guide their trading strategies.
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