The Federal Reserve (Fed) holds significant sway over the U.S. economy and financial markets, and its monetary policy decisions often come with far-reaching implications. As the year winds down, the anticipation for the Fed’s last meeting of 2024 builds, especially considering widespread expectations for a 25 basis point cut in the policy rate. This decision, scheduled for announcement on December 18, will not only set the tone for the year ahead but also influence the valuation of the U.S. Dollar (USD) amidst holiday trading.
Investors and analysts are closely monitoring the Fed’s stance, and the CME FedWatch Tool indicates that the markets have fully priced in a 25 bps reduction. This will adjust the policy rate to a range between 4.25% and 4.5%. However, the broader implications of this rate cut are under scrutiny. While the initial reaction in the market may seem significant, the fluctuations in the USD could be temporary if investors shift their focus to the specifics outlined in the revised Summary of Economic Projections (SEP). Market participants will scrutinize both the SEP and the comments made by Chairman Jerome Powell during the subsequent press conference for further insights into the Fed’s long-term policy outlook.
The SEP, which provides a snapshot of the Fed officials’ economic forecasts, plays a key role in shaping expectations around monetary policy. In September, the median projection for the federal funds rate at the end of 2025 was set at 3.4%. Any adjustments to this forecast in December will serve as a critical indicator of the Fed’s future directions. If upward revisions hint at a more hawkish approach, the markets could react positively, potentially leading to a strengthening of the USD against global currencies. Conversely, if projections suggest a more dovish outlook, it could place downward pressure on the USD, indicating a more cautious stance regarding inflation and growth.
During the press conference that follows the Fed’s announcement, Powell is expected to address numerous inquiries concerning the implications of various economic factors influencing their decisions. Notably, questions regarding how President-elect Trump’s proposed tariffs could shape inflationary expectations may arise. Should Powell express concerns about the potential tariff impacts, it may suggest the Fed’s approach will remain measured as they navigate the complexities of inflation, thereby lending strength to the USD.
However, if Powell downplays inflation risks and focuses on sustaining robust labor market conditions, it could signify a more dovish position. This nuance could discourage investors from placing their bets on the USD, leading to a potential uptick for currency pairs like EUR/USD.
As analysts approach the technical analysis of key currency pairs like EUR/USD, current trends suggest a bearish outlook. The pair remains entrenched within a descending regression channel, displaying limited buyer interest. The Relative Strength Index (RSI) near the 40 mark reinforces this sentiment. With immediate support resting at the static level of 1.0400, traders will need to look for significant price levels that might signal reversals.
Should EUR/USD manage to recover and surpass the resistance of 1.0600, where the Fibonacci retracement level sits, this might convince sellers to reconsider their positions. However, should support levels give way, further declines could draw a focus on lower targets like 1.0260 and 1.0200.
The Federal Reserve’s decisions and communications will remain a pivotal focus in shaping both the U.S. economy and markets as 2024 concludes. Investors must balance their strategies based on not just the expected rate cut but also on the overarching signals emanating from the Fed’s economic projections and Powell’s narrative. The intertwining of monetary policy with global economic currents underscores the need for nuanced understanding as we head into the new year. Ultimately, both short-term market reactions and longer-term economic ramifications will hinge on the insights gleaned from these pivotal meetings.