The US central bank cut interest rates by 50 basis points on Wednesday but did not create volatility for the EURUSD exchange rate.
EURUSD – Daily Chart
The price of EURUSD was trading at the 1.1140 level where there is some resistance ahead of the larger 1.1277 barrier. There are supports at 1.10 and 1.06 to the downside with the 1.0520 level being the key support.
The Federal Reserve cut interest rates for the first time in four years on Wednesday. After managing to cool rampant inflation, the bank had telegraphed its planned beginning of easing, but it went with an aggressive 50 bps cut to start.
Inflation has plunged from a peak of 9.1% in June 2022 to 2.5% last month, almost touching the Fed’s 2% target. Central bank officials raised the benchmark interest rate 11 times in 2022 and 2023 to a two-decade high of 5.3% in order to slow borrowing and spending.
Wage growth has since slowed down and there is a sign of a slowdown in the jobs market, removing potential sources of pricing pressure. Oil and gas prices have also fallen and a weak consumer has forced companies like Target and McDonald’s to extend discounts.
Fed Chair Jerome Powell said in a speech last month that “we will do everything we can to support a strong labour market.” He added that “further weakening” in jobs would be “unwelcome.”
The EURUSD exchange rate has been rising as traders began to price in the prospects of a Fed rate cut. The pair may now switch back to the pace of ECB v Fed easing. The US economy has remained stronger than in Europe and that could be the driver over the coming months. The ECB cut rates for the second time this year last week and its Chief Economist said that he prefers a gradual shift lower.
“A gradual approach to dialling back restrictiveness will be appropriate if the incoming data are in line with the baseline projection,” Philip Lane said. “We should retain optionality about the speed of adjustment.”
Peter Kazimir, another ECB policymaker, was keen to close the door in October, arguing that quick cuts were risky and the bank needed more data on inflation before acting.
“We will almost surely need to wait until December for a clearer picture before making our next move,” Kazimir said.
