EUR/USD softens below 1.0950 as Fed rate decision looms
- EUR/USD edges lower to around 1.0935 in Wednesday’s Asian session.
- The Fed is expected to leave its interest rate unchanged and will update its rate projections on Wednesday.
- Germany's parliament approved plans for a massive spending surge on Tuesday.
The EUR/USD pair weakens to near 1.0935 during the Asian trading hours on Wednesday, pressured by a modest recovery in the US Dollar (USD). Traders prefer to wait on the sidelines ahead of the US Federal Reserve (Fed) interest rate decision on Wednesday.
The stronger-than-expected US economic data on Tuesday has provided some support to the Greenback. Data released by the Fed showed that Industrial Production in the United States rose by 0.7% MoM in February, compared to 0.3% in January (revised from 0.5%). This reading came in above the market consensus of 0.2%.
Markets widely expect the US central bank to hold rates steady at its March meeting on Wednesday amid persistent inflation concerns and economic uncertainty. The Press Conference and Summary of Economic Projections (SEP), or ‘dot-plot,’ will be closely watched as it might offer more cues about the economic outlook and the path of US interest rates.
Across the pond, Germany's parliament approved plans for a massive spending surge on Tuesday. This positive development could underpin the shared currency, as the approval of the plans in the Bundestag on Tuesday would provide the chancellor-in-waiting with a windfall of hundreds of billions of euros to boost investment after two years of contraction in Europe's largest economy.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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