Federal Reserve set to keep interest rate unchanged, focus on data and Trump’s policies
- The Federal Reserve is widely expected to leave monetary policy settings unchanged following the January meeting.
- Fed Chairman Powell’s presser could provide important clues about the rate outlook.
- The US Dollar could come under bearish pressure if the Fed leaves a rate cut in March on the table.
The United States (US) Federal Reserve (Fed) will announce monetary policy decisions following the first policy meeting of the year on Wednesday. Market participants widely anticipate that the US central bank will leave monetary policy settings unchanged after cutting the interest rate by 25 basis points (bps) to 4.25%-4.5% in December.
The CME FedWatch Tool shows that investors virtually see no chance of a rate cut in January, while pricing in a 33% probability of a 25 bps reduction in March. Hence, the statement language and comments from Fed Chairman Jerome Powell could drive the US Dollar’s (USD) valuation, rather than the interest rate announcement.
“The FOMC is widely expected to maintain its policy stance unchanged at 4.25%-4.50% next week, with Chair Powell expected to communicate what's likely to be a cautious process for policymaking in the near horizon, while still espousing an easing bias,” said TD Securities analysts previewing the Fed event. “In our view, decisions by Fed officials, while still highly data-dependent, are increasingly turning more Trump-dependent,” 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 Wednesday at 19:00 GMT. This will be followed by Fed Chairman Jerome Powell's press conference starting at 19:30 GMT.
The revised Summary of Economic Projections (SEP), also known as the dot plot, published after the December policy meeting showed that policymakers are projecting two 25 bps rate cuts in 2025. In the press conference, Chairman Powell explained strong economic growth, low unemployment and expectations for higher inflation were primary reasons for projecting a slower policy-easing path.
The most likely scenario for the Fed is to reiterate its data-dependent approach to policy and for officials to wait for US President Donald Trump’s trade and other economic policies to take shape. “We expect significant policy changes, we need to see what they are and the effects to get a clearer picture,” Powell said at the presser in December.
In case Powell adopts an optimistic tone about the inflation outlook after Trump refrained from imposing day-one tariffs and voiced his willingness to work with China on trade issues, markets could see that as a sign pointing to a rate cut in March and weigh on the USD with the immediate reaction. On the other hand, investors could adopt a cautious stance if Powell talks about the potential undesired effects of proposed 25% tariffs on imports from Canada and Mexico, two of the biggest US exporters, on inflation. In this scenario, the USD could gather strength against its rivals.
Eren Sengezer, European Session Lead Analyst at FXStreet, provides a short-term technical outlook for EUR/USD:
“EUR/USD remains technically bullish on the daily chart, with the Relative Strength Index (RSI) indicator rising above 60 for the first time since late September. Additionally, the pair holds comfortably above the 50-day and the 20-day Simple Moving Averages (SMA).”
“On the upside, the Fibonacci 38.2% retracement level of the October-January downtrend aligns as the first resistance level at 1.0580 ahead of 1.0670-1.0700 (Fibonacci 50% retracement, 100-day SMA). In case the pair drops below 1.0440 (50-day SMA, Fibonacci 23.6% retracement) and starts using this level as resistance, technical sellers could take action and open the door for an extended slide toward 1.0350 (20-day SMA) and 1.0200 (end-point of the downtrend).
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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