Federal Reserve expected to deliver second consecutive interest-rate cut

• The US Federal Reserve is expected to cut the policy rate after the October meeting. 
• The statement language and Fed Chair Powell’s comments will be key in the absence of economic data releases.
• The US Dollar faces a two-way risk amid potential changes to market pricing of the rate outlook.

The United States (US) Federal Reserve (Fed) will announce its interest rate decision and publish the Monetary Policy Statement following the October policy meeting on Wednesday. 

Market participants widely anticipate the US central bank to cut the policy rate by 25 basis points (bps), lowering it to the range of 3.75%-4%.

The CME FedWatch Tool shows that investors are fully pricing in the 25 bps reduction in October and see about a 95% probability of one more 25 bps cut at the last policy meeting of the year in December.  

The revised Summary of Economic Projections (SEP), published in September by the Fed, showed that policymakers’ projections implied two more 25 bps cuts in 2025, followed by 25 bps reductions in both 2026 and 2027.

According to a recently-conducted Reuters poll, 115 of 117 economists have predicted that the Fed will opt for a 25 bps cut in October, while 83 of them saw one more 25 bps cut in December. Moreover, 25 of 33 economists noted that the bigger risk to the Fed rate policy by the end of this cycle is that it would set rates too low.

The Fed’s meeting will take place under unusual circumstances. The federal government entered a shutdown on October 1 after Congress failed to pass new funding legislation. As a result, several key macroeconomic data releases that the Fed assesses when setting its monetary policy have been suspended, including the monthly September employment report and multiple weekly Initial Jobless Claims data. The Consumer Price Index (CPI) data for September, originally scheduled to be published on October 15, was released with a delay on October 24. The report showed that the CPI and the core CPI rose by 0.3% and 0.2%, respectively. Both of these prints came in softer than analysts’ estimates.

TD Securities analysts agree that the US central bank will likely continue recalibrating policy closer to neutral, implementing another 25 bps cut. “Despite mounting uncertainty amid the lack of data releases, we still expect the Committee's guidance to tilt dovish. Chair Powell will likely continue walking a fine line when flagging signs of labor market weakness. The risk of persistent inflation remains a risk,” they add. 

Fed Chair Powell recently indicated that they could be nearing the end of the quantitative tightening (QT) and stop reducing the size of the central bank’s bond holdings. The Fed could either officially announce that it will stop the balance sheet runoff or provide a future date. Deutsche Bank analysts argue Fed Chair Powell will focus on the balance sheet policy and the policy framework review in the press conference. “On QT, our team expects the Fed to announce an end to the programme today, with the run-off concluding next month,” they note.

When will the Fed announce its interest rate decision and how could it affect EUR/USD?

The Fed is scheduled to announce its interest rate decision and publish the Monetary Policy Statement at 18:00 GMT. This will be followed by Fed Chair Jerome Powell's press conference starting at 18:30 GMT. 

The rate decision itself is unlikely to trigger a significant market reaction. Moreover, it shouldn’t be a surprise to see policymaker Stephen Miran dissent with a vote for a 50 bps cut.

Since a December rate cut is largely priced in, the US Dollar (USD) could gather strength if the policy statement, or Fed Chair Powell, adopts a cautious tone on further policy easing, citing the uncertainty created by the lack of economic data. Additionally, any comments suggesting heightened upside inflation risks, while economic activity remains healthy, could have a similar effect on the USD’s performance and drag EUR/USD lower.

Conversely, the USD could come under pressure if Powell notes that the government shutdown could further hurt the labor market and cause the central bank to put more weight on the employment side of its mandate. Also, an optimistic tone on the inflation outlook could be seen as dovish and intensify the USD weakness, opening the door for a leg higher in EUR/USD. 

Societe Generale analysts note that the US’ Gross Domestic Product (GDP) growth was well above potential, at least until the third quarter, and inflation continued to rise. “There are justified concerns about a weakening labour market and the potential damage from high and rising uncertainty. The thick fog left by the absence of data ought to tilt the balance towards something of an “insurance” cut. That said, the decision is again likely to not be unanimous,” they explain.

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

“EUR/USD manages to hold slightly above the lower limit of an ascending regression channel coming from January, and the Relative Strength Index (RSI) indicator on the daily chart stays near 50, suggesting that the bullish bias remains intact but lacks strength.”

“The 100-day Simple Moving Average (SMA), the 50-day SMA and the 20-day SMA converge in the 1.1650-1.1700 area, offering initial resistance to the pair. A decisive move above this region could attract technical buyers. In this scenario, 1.1920 (September 17 high) could be seen as the next resistance level before 1.2000 (mid-point of the ascending channel, round level). Looking south, the first support could be spotted at 1.1600 (lower limit of the ascending channel). A daily close below this level could open the door for an extended slide toward the 200-day SMA, currently located near 1.1300.”