Federal Reserve expected to deliver 25 bps interest-rate cut, shrugging off Trump victory
- The Federal Reserve is widely expected to lower the policy rate after Donald Trump won the US presidential election.
- Fed Chairman Powell’s remarks could provide important clues about the rate outlook.
- The US Dollar rally could lose steam in case the Fed leaves the door open for another rate cut in December.
The US Federal Reserve (Fed) will announce monetary policy decisions following the November policy meeting on Thursday, just barely two days after Donald Trump was elected as the 47th president of the United States. Market participants widely anticipate that the US central bank will lower the policy rate by 25 basis points (bps) to the range of 4.5%-4.75%.
The CME FedWatch Tool shows that investors are fully pricing in a 25 bps cut, while there is a nearly 70% probability of another rate reduction in December. The market positioning suggests that the US Dollar (USD) faces a two-way risk heading into the event.
Donald Trump’s victory in the presidential election triggered a rally in the US Treasury bond yields and boosted the USD on Wednesday. Additionally, Republicans gained the majority in the Senate and looked on track to control the House, paving the way for faster implementation of policies.
Assessing the outcome of the election, “Republican clean sweep makes it significantly easier to implement full policy agenda. Risks very firmly tilted to the downside for US and global economic growth and to the upside for US inflation,” said ABN Amro analysts in a recently published report.
“While Fed policy could be tighter than our current base line, the ECB could cut rates faster. Republican sweep sets the stage for US-European rates divergence. Parity for EUR/USD could be on the cards,” 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 on Thursday at 19:00 GMT. This will be followed by Fed Chairman Jerome Powell's press conference starting at 19:30 GMT.
A 25 bps rate cut is unlikely to trigger a significant market reaction because this decision is already priced-in. But investors will pay close attention to comments from Chair Powell in the post-meeting press conference, which could be more market-moving.
In case Powell leaves the door open for one more 25 bps rate cut in December, the immediate reaction could hurt the USD. Powell will surely be asked about the potential impact of proposed Trump policies on the inflation and growth outlook. The Chairman is likely to refrain from commenting on these issues and reiterate the data-dependent approach to policymaking, regardless of the winner of the election.
If Powell voices concerns over the potential impact of tariffs on inflation expectations, this could be seen as a sign that the US central bank could take its time to ease the policy further. In this scenario, the USD could extend its weekly rally and cause EUR/USD to stretch lower.
Nevertheless, it’s too early for policymakers to assess the potential changes to the monetary policy due to proposed policies during the campaigning period. In December, the Fed will publish the revised Summary of Projections and that publication is likely to provide more useful information on what officials expect from the economy under the Trump administration.
Eren Sengezer, European Session Lead Analyst at FXStreet, provides a short-term technical outlook for EUR/USD:
“EUR/USD remains technically bearish following the sharp decline seen on Wednesday. The Relative Strength Index (RSI) indicator on the daily chart stays slightly above 30, suggesting that the pair has more room on the downside before turning technically oversold.”
"On the downside, static support seems to have formed at 1.0700 before 1.0600 (static level from April) and 1.0500 (static level from October 2023, round level). In case EUR/USD gathers recovery momentum on a dovish Fed tone, it could face strong resistance at 1.0870, where the 200-day Simple Moving Average (SMA) is located. Technical buyers could take action once the pair flips that level into support. In this scenario, the 100-day SMA coils be seen as next hurdle at 1.0940 before 1.1000 (static level, round level)."
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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