Euro holds steady above 1.1600 ahead of Fed rate decision
- EUR/USD flatlines around 1.1610 in Wednesday’s early Asian session.
- Fed is set to hold its benchmark interest rate steady at the June policy meeting.
- Trump may release the US-Iran deal before Friday.
The EUR/USD pair holds steady near 1.1610 during the early Asian session on Wednesday. Traders prefer to wait on the sidelines ahead of the US Federal Reserve (Fed) interest rate decision later in the day. Also, the US May Retail Sales will be published.
The Fed is widely expected to keep its benchmark interest rate unchanged at a target range of 3.50% to 3.75% at its upcoming June policy meeting on Wednesday. Traders will closely monitor the press conference, as Kevin Warsh could offer clues on whether he seeks to raise interest rates to tame inflation or cut them, as Trump has long demanded.
Any hawkish remarks from Fed policymakers could lift the US dollar (USD) and act as a headwind for the major pair in the near term. Markets are pricing in a 42.6% probability that the US central bank will raise interest rates by 25 basis points (bps) by year-end, according to the CME FedWatch tool.
A deal to reopen the Strait of Hormuz could spur a rally in riskier assets such as the shared currency. US Vice-President JD Vance said on Tuesday that US President Donald Trump may decide to release a preliminary deal to end the war with Iran before Friday, after Trump said the agreement had already been signed.
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.