Fed Rate Cut Finally Arrives,Dollar Index: Negative Catalysts Largely Priced In,Euro Rally May Be Running Out of Steam

Tradingkey - The Federal Reserve lowered the target range for the federal funds rate by 25 basis points to 4.00%–4.25% late yesterday, as widely expected, and signaled two additional rate cuts this year. Chair Jerome Powell said the U.S. unemployment rate remains low but has edged higher, while inflation has risen recently and continues to run at a slightly elevated level.

Following the rate decision, the U.S. dollar index initially plunged to around 96.2, its lowest level since February 2022, but later recovered sharply, erasing losses. The rebound suggests markets are gradually pricing in the anticipated rate cuts, reflecting a "sell-the-news" dynamic where negative catalysts are now largely priced in.

The Federal Open Market Committee (FOMC) approved the rate cut by an 11-to-1 vote, signaling greater internal consensus than Wall Street had anticipated. Newly appointed Governor Michelle Bowman was the sole dissenter, advocating for a 50-basis-point cut. Chair Jerome Powell reiterated that the move is a "risk-management" decision and declined to signal the start of a prolonged easing cycle.

The Fed has clearly shifted its focus from inflation to signs of a slowing labor market, and the weakening jobs picture is paving the way for further rate cuts this year. The dot plot indicates that most officials expect one cut in both the October and December meetings, implying an additional 50 basis points of easing by year-end. Ten participants project two more cuts, while nine favor just one. A single outlier dot—likely from Governor Bowman—suggests an additional 125 basis points of cuts, reflecting a more aggressive dovish stance.

Eurozone inflation remains relatively stable, with the European Central Bank projecting headline inflation at 2.1% for 2025—close to its 2% medium-term target. However, the region’s economic growth is weak, and softening U.S. demand could weigh on eurozone GDP in the third quarter of 2025. Some forecasts suggest the bloc will eke out only minimal growth during the period, with GDP expected to expand by just 0.1%.

European Central Bank Vice President Luis de Guindos said the central bank stands ready to adjust policy at any time if economic conditions change, even though current interest rates are deemed appropriate.

EUR/USD Technical Outlook

Source: Mitrade EUR/USD Outlook

Technically, the euro extended its gains against the dollar overnight, hitting a fresh high since September 2021. However, the rally quickly reversed as short-term longs took profits, resulting in a bearish "Dark Cloud Cover" pattern on the daily chart—a potential signal that the recent uptrend may be losing momentum.

The KD indicator shows both lines entering the overbought zone near 80, with the fast line crossing below the slow line, confirming a bearish death cross. This suggests strengthening downside pressure in the near term, which could further weigh on EUR/USD.

On the upside, initial resistance is seen at 1.1950, followed by 1.2050, with a key barrier at 1.2100.

On the downside, initial support lies at 1.1700, followed by 1.1600, with a more critical support level at 1.1500.