EUR/USD Falls as Chair Powell Dismissed a March Cut

Fed Cuts Coming, but Not Yet

The US Federal Reserve has delivered 525 basis points of tightening since the March 2022 lift-off and has been looking to end this process, given the lag in the transition mechanism and as inflation is coming down and the labor market normalizes. It has not raised rates since July and has pointed to lower rates, with its December projections suggesting three cuts this year. ^[1]

On Wednesday, policymakers stood pat again and took another step towards normalization, signaling that the terminal rate has been reached. The statement softened further, saying that they will look carefully at incoming data "in considering any adjustments to the target range for the federal funds rate" ^[2], compared to the previous reference of "in determining the extent of any additional policy firming…". In his opening remarks, Chair Powell noted that policy rate "is likely at its peak" ^[3], a significant shift from the "likely at or near its peak" comment in December.

The Fed moved further in a dovish direction and laid the groundwork for a policy pivot, but is not yet ready to do that. According to the policy statement, the Committee "does not expect it will be appropriate" to lower rates until it has "greater confidence" that inflation is falls sustainably towards the 2% target. During Wednesday's press conference, Mr Powell dismissed calls for a March cut, warning that "I don't think it's likely that the committee will reach a level of confidence" to move in that meeting.

ECB More Reserved

The European Central Bank has also likely ended its tightening cycle after 450 basis points of cuts. Last week officials stayed on the sidelines and hinted once again at peak rates. They have however maintained a more hawkish stance around next steps, compared to their US peers. They said that interest rates need to stay current levels for a "sufficiently long duration" to restore price stability and although they too expect lower rates this year, they appear more reserved. President Lagarde stood by recent remarks that hinted at summer cuts, but warned that it is "premature" for the Governing Council to discuss such action. ^[4]

EUR/USD Analysis

The greenback strengthens as Chair Powell essentially ruled out a cut at the next meeting and the pair extends its poor start to the year. Immediate bias is on the downside and EUR/USD is in risk of breaching the December lows (1.0722), but we are cautious around further losses that would tackle 1.0610.

The policy differential is a bit murky at this point, but the Fed has more clearly pointed to a pivot compared to the ECB. Furthermore, markets have not totally priced out a March cut by the fed. These factors can support EUR/USD and give it the chance to retake the EMA200 (1.0890). This could pause the downside momentum, but the common currency does not inspire confidence at this point for sustained strength towards and beyond 1.1017 .