EUR/USD at 3-week high, Fed cuts for 1st time since Mar 2020

The EUR/USD currency pair traded in proximity to a fresh three-week high of 1.1189 on Thursday, after the Federal Reserve began its monetary easing cycle with an out-sized rate cut, the first reduction in borrowing costs since March 2020.

The Fed reduced the target range for the federal funds rate by 50 basis points to 4.75%-5.00% at its September meeting.

The Fed indicated confidence that inflation was moving sustainably toward the 2% target and took action to prevent a slowdown in the labor market.

A rate reduction was largely expected, while there was speculation if a more conservative 25 bps cut would be delivered.

Yet, Fed Chair Jerome Powell said at the press conference following the policy decision that half-percentage point rate cuts were not the “new pace.”

Fed policy makers noted they expected the benchmark rate to be cut by additional 50 basis points by the end of this year, by 100 basis points in 2025 and by another 50 basis points in 2026, which would take borrowing costs to a 2.75%-3.00% range.

The US central bank also issued new economic forecasts. Full-year 2024 PCE inflation forecast has been revised down to 2.3% from 2.6% in the June projection.

PCE inflation forecast for 2025 has been lowered to 2.1% from 2.3% previously.

Additionally, full-year 2024 GDP growth forecast has been revised down to 2% from 2.1% in the June projection.

And, the GDP growth forecast for 2025 has been maintained at 2%.

The Federal Reserve’s move increases scope for the European Central Bank to cut rates at its October policy meeting. Markets are now pricing in an almost 30% chance of an ECB rate cut in October.

Yesterday data showed that the annual CPI inflation rate in the Euro Area had been confirmed at 2.2% in August, while easing from 2.6% in July.

As of 10:04 GMT on Thursday the EUR/USD currency pair was gaining 0.50% to trade at 1.1174.