Federal Reserve Preview: All eyes on clues about the Fed's first interest rate cut in four years

• The Federal Reserve is widely anticipated to keep interest rates unchanged.
• Fed Chairman Powell’s remarks could provide important clues about the policy-easing strategy for the rest of the year.
• Markets see a strong chance of the Fed lowering policy rate multiple times starting in September.

The US Federal Reserve (Fed) will announce monetary policy decisions following the July 30 - 31 policy meeting on Wednesday. Market participants widely anticipate that the US central bank will leave the policy rate unchanged at 5.25%-5.5% for the eighth consecutive meeting.

The CME FedWatch Tool shows that markets see little to no chance of a rate cut in July but suggests that a September rate reduction is fully priced in. Hence, investors will scrutinize the changes in the statement language and comments from Fed Chairman Jerome Powell to figure out the policy-easing strategy for the rest of the year. According to the FedWatch Tool, there is a nearly 70% probability that the US central bank will cut the policy rate by a total of 75 basis points in 2024.

Growing optimism about disinflation progress resuming in the second half of the year – following the soft inflation prints seen in the second quarter – became apparent in Fed policymakers’ comments before the blackout period.

Richmond Federal Reserve President Thomas Barkin said that policymakers will debate at the July policy meeting whether it is still appropriate to describe inflation as elevated. In an interview with Yahoo Finance, Chicago Fed President Austan Goolsbee acknowledged that they have had multiple months of better inflation data, noting that he feels “a lot better on inflation.” Additionally, San Francisco Fed President Mary Daly said that there was significant progress on inflation and that she saw growing confidence in nearing the 2% target.

Previewing the Fed’s July policy meeting, “the FOMC is widely expected to keep the Fed funds target range unchanged for an eighth consecutive meeting next week, with the Committee's forward guidance proving key for setting up the stage for the start of the easing cycle,” said TD Securities analysts in a weekly report and added: “While Powell is likely to fall short from fully committing to a rate cut in September, he is likely to hint that the Fed's almost there.”

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 at 18:00 GMT on July 31. This will be followed by Chairman Powell's press conference starting at 18:30 GMT. 

In his last public appearance, Chairman Powell commented on the inflation outlook and said: “In the second quarter, actually, we did make some more progress on taming inflation,” and further elaborated: “We've had three better readings, and if you average them, that's a pretty good place.”

Powell might not outright confirm a rate cut in September but he is unlikely to push back against this expectation. Investors will be more curious about whether the Fed, or Powell, will leave the door open to multiple rate cuts in the last quarter of the year.

In case Powell hints that they might opt for additional policy easing toward the end of the year, the immediate market reaction could provide a boost to risk sentiment. In this scenario, the US Dollar (USD) is likely to come under renewed selling pressure. However, the fact that markets have already priced in a strong possibility of a 75 bps total rate reduction this year suggests that the USD doesn’t have a lot of room left on the downside.

If Powell reiterates the data-dependent approach and suggests that they will take their time to assess the impact of the first rate cut on the economy before deciding whether another rate reduction will follow, the USD could stage a rebound, given the market positioning.

“The 'Goldilocks' US economic backdrop of solid growth and modest disinflation suggests the Fed is unlikely to cut the funds rate as much as is currently priced in. Fed funds futures are pricing almost three cuts by December 2024 and a total of roughly 150 bps of easing over the next 12 months,” BBH analysts said in assessment of the Fed’s policy outlook and further commented on the USD’s potential performance:

“Moreover, rising US productivity can lead to low inflationary economic growth, higher real interest rates and an appreciation in the currency over the longer term.” 

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

“1.0790-1.0810, where the 200-day, 50-day and 100-day Simple Moving Averages are located, aligns as a key pivot area for EUR/USD. As long as this area stays intact as support, technical buyers could remain interested. On the upside, the 20-day SMA aligns as interim resistance at 1.0860 before 1.0950 (July 17 high). In case EUR/USD falls below 1.0790-1.0810 and starts using this region as resistance, 1.0700 (psychological level, static level) could be set as the next bearish target before 1.0665 (June 26 low).”