US Federal Reserve Decision Preview: Dot plot could shed light on Fed’s interest rate path

• The Federal Reserve is widely expected to hold policy rate unchanged.
• Fed Chairman Powell’s remarks could provide important clues about the timing of the policy pivot.
• Markets see a strong chance that the Fed will wait until September to lower the interest rate.

The US Federal Reserve (Fed) will announce monetary policy decisions following the June policy meeting and release the revised Summary of Economic Projections (SEP), the so-called dot plot, on Wednesday. Market participants widely anticipate that the US central bank will leave the policy rate unchanged at 5.25%-5.5% for the seventh consecutive meeting.

The CME FedWatch Tool shows that markets see little to no chance of a rate cut either in June or July. Hence, investors will scrutinize the SEP and comments from Fed Chairman Jerome Powell to try to confirm or deny a policy pivot in September. According to the CME FedWatch Tool, there is a 51% probability of a no change in the Fed interest rate in September.

The data from the US showed that the core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge of inflation, rose 0.2% on a monthly basis in April. This reading came in below the market expectation for an increase of 0.3% and revived optimism about a Fed policy pivot in September. The upbeat employment figures for May, however, caused investors to reassess the US central bank’s policy outlook. After the US Bureau of Labor Statistics reported that Nonfarm Payrolls rose 272,000 in May, compared to the market expectation of 185,000, and the annual wage inflation edged higher to 4.1% from 4% in April, the probability of a Fed rate cut in September dropped to 49% from 60% before the release.

The dot plot published in March showed that policymakers were expecting the Fed to lower the policy rate by a total of 75 basis points in 2024, while expecting the annual core PCE inflation to be at 2.6%, up from 2.4% projected in December’s SEP.

Previewing the Fed meeting, “the FOMC is expected to keep the Fed funds target range unchanged at 5.25%-5.50%, with Chair Powell likely providing a similar policy message to May,” TD Securities analysts say and add:

“However, the risk is that the chairman appears optimistic given the recent evolution of the consumer, and if May CPI inflation shows progress. We expect the dot plot to show two cuts as the new median for 2024, and four for 2025.”

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 alongside the SEP on Wednesday, June 12, at 18:00 GMT. This will be followed by Chairman Powell's press conference starting at 18:30 GMT. 

In his last public appearance, Chairman Powell said they are committed to bringing inflation back to 2% but acknowledged that the restrictive policy may take longer than expected to reach this goal. "I don't think it's likely that the next move would be a rate hike, it’s more likely that we would hold the policy rate where it is,” he added.

In case the dot plot shows that policymakers are still expecting a total of 75 bps reduction in the policy rate in 2024, this could be seen as a significant dovish surprise and weigh heavily on the US Treasury bond yields and the US Dollar (USD). Nevertheless, this scenario is extremely unlikely at this point.

The market positioning suggests that the USD is facing a two-way risk heading into the event. The CME FedWatch Tool shows that there is a less-than-50% probability of the Fed lowering the policy rate by 50 bps in 2024. If the dot plot points to two 25 bps cuts this year, the initial reaction could weigh on US T-bond yields and force the USD to weaken against its rivals. On the other hand, the USD is likely to outperform its rivals in case policymakers foresee a single rate cut in 2024. Finally, there could be a strong USD rally if the SEP shows that several some policymakers prefer the policy rate to remain unchanged for the rest of the year.

FXStreet analyst Yohay Elam shares a brief preview of possible market reaction to the dot plot. “A median of one cut would boost the US Dollar (USD), while two cuts would buoy stocks and Gold,” Elam says and continues: “Investors will also eye the statement, especially comments on inflation, on the back of fresh CPI data published earlier in the day. The key word is confidence. If the bank is confident that inflation is falling, it would be positive to markets, while reiterating a worried approach on price rises would weigh.”

Meanwhile, Eren Sengezer, European Session Lead Analyst at FXStreet, provides a short-term technical outlook for EUR/USD:

“The Relative Strength Index (RSI) on the daily chart dropped below 50 following the sharp two-day decline seen on Friday and Monday, reflecting the bearish shift in the short-term outlook. Additionally, EUR/USD fell below the 1.0790-1.0800 area, where the lower limit of the ascending regression channel meets the 100-day and the 200-day Simple Moving Averages (SMA).”

“If EUR/USD fails to reclaim 1.0790-1.0800, technical sellers could remain interested. In this scenario, an extended slide toward 1.0680 (Fibonacci 78.6% retracement of the uptrend that started in mid-April) and 1.0620 (beginning point of the uptrend) could be seen. On the upside, the 20-day SMA could act as interim resistance at 1.0850 before 1.0900 (mid-point of the ascending channel) and 1.0970 (upper limit of the ascending channel), once the pair stabilizes above 1.0790-1.0800.”