• EUR/USD is under pressure amid fading expectations the Fed will cut interest rates early. 
• The dot plot from the Fed’s meeting on Wednesday could show a shift from three to two cuts this year, Bloomberg reports. 
• Such a change would probably cause more negativity for EUR/USD.
   

EUR/USD has taken a step lower and is now trading within a new range in the 1.0800s following last week’s warmer-than-expected US inflation data, which increased the probability the Federal Reserve (Fed) will need to keep interest rates higher for longer. 

Since higher interest rates attract more foreign capital inflows, this was positive for the US Dollar (USD), but negative for EUR/USD, which measures one Euro’s (EUR) buying power in USD terms. 

EUR/USD traders prepare for Fed meeting on Wednesday

EUR/USD is likely to see heightened volatility on Wednesday when the Fed concludes its March meeting, announces its policy decision and publishes its Summary of Economic Projections (SEP). It is highly unlikely the Fed will announce a rate cut at the meeting, even though that was a possibility a few weeks ago. 

“The reality is justly sinking in that the Fed is going to take its time,” says Mark Cranfield, an analyst at Bloomberg MLIV.

His view is backed up by the CME FedWatch Tool, which calculates the market-based probabilities of the Fed making rate cuts. At the time of publication it is calculating a 58% chance the Fed will make one or more 0.25% cuts by June, and 76.5% by July. This has fallen from the 80% for June registered by the tool at the beginning of the month. 

In the last SEP, the board of governors of the Fed predicted at least three 0.25% interest rate cuts in 2024 in their “dot plot”, however, Bloomberg News says there is now a material possibility that this will be reduced to only two cuts after the March meeting. Such a retrenchment would be viewed as “quite aggressive,” according to Cranfield. As such it would be likely to lead to further weakness for EUR/USD. 

“A pleasant surprise would be if the Fed were to maintain three dot-plot cuts,” added Cranfield, who suggests such a maintenance of the status quo would be bearish for USD (bullish for EUR/USD).