EUR/USD tumbles after Fed rate cut and Powell signals limited easing ahead
- EUR/USD drops after Fed delivers 25 bps cut, while the SEP points to another 50 bps by year-end.
- Powell stresses inflation is “somewhat elevated” and labor demand “softened,” but rules out broad support for a 50 bps move.
- ECB holds rates steady, signaling end of easing cycle, keeping long-term EUR/USD outlook tilted to upside.
The Euro (EUR) reversed course and dropped against the US Dollar (USD) amid a perceived hawkish cut of 25 bps by the Federal Reserve (Fed) on Wednesday. Traders booked profits after pushing the pair to a yearly high of 1.1918, before reversing 100 pips, towards its current price. EUR/USD trades at 1.1812, down 0.48%.
Euro reverses from yearly high of 1.1918 as Powell signals cautious easing path
The Federal Reserve acknowledged growing downside risks to the labor market, noting that while unemployment remains low, it has edged higher. The policy decision was not unanimous, with Governor Stephen Miran voting for a larger 50-basis-point cut in line with some analysts’ expectations.
On inflation, the Fed said price pressures have “moved up” and remain “somewhat elevated,” while economic growth has moderated through the first half of 2025.
The Summary of Economic Projections (SEP) pointed to an additional 50 bps of rate cuts anticipated by year-end.
In his presser, Fed Chair Jerome Powell said labor demand “has softened” while inflation remains “somewhat elevated.” He noted that the balance of risks has “shifted” and emphasized that monetary policy is well positioned to respond as needed, though he cautioned that the labor market is “not solid.”
Addressing speculation about a larger move, Powell dismissed the notion, saying there was “no widespread support for a 50-basis-point cut today,” and stressed that the Fed is not in a rush to ease policy.
Across the pond, the latest inflation figures had reinforced the European Central Bank’s (ECB) decision to hold rates unchanged at the latest meeting, while telegraphing that the easing cycle has come to an end. Hence, further EUR/USD upside is seen as the interest rate differential between the US and the Eurozone could shrink dramatically for the foreseeable future.
Daily market movers: EUR/USD tumbles despite Fed signaling further cuts ahead
- The Fed Summary of Economic Projections (SEP) is up next as it could dictate the path for the fed funds rate toward the end of the year and 2026. So far, traders have priced in close to 125 basis points of easing toward December 2026, projecting rates to end at around the 3%-3.25% range.
- The US economy showed mixed signals in August. Housing Starts tumbled 8.5% MoM, reversing July’s 3.4% gain, and fell to 1.307 million units from 1.429 million — the lowest level since May. Building Permits also declined, dropping 3.7%.
- Contrarily, Retail Sales outperformed forecasts, climbing 0.6% MoM versus expectations of 0.2%. The Control Group, which feeds into GDP calculations, rose 0.7% MoM after a 0.5% increase the prior month.
- The Eurozone docket featured the Harmonized Index of Consumer Prices (HICP) for August came at 2% YoY, below forecasts and July’s 2.1% print. Core HICP was aligned with estimates and unchanged from the previous reading of 2.3%.
- The US Dollar Index (DXY), which tracks the buck’s performance against a basket of six currencies, is up 0.38% at 97.03.
- Fitch Ratings projects the Fed will deliver two 25-basis-point rate cuts this year, one in September and another in December — followed by three additional reductions in 2026. In contrast, the agency does not anticipate further easing from the ECB.
Technical outlook: EUR/USD hoovers around 1.1800, post Fed’s decision
EUR/USD consolidates with bullish momentum building as the pair approaches the 1.1900 mark. The Relative Strength Index (RSI) supports further upside, staying below overbought territory.
A break above 1.1900 would expose 1.1950 and the psychological 1.2000 level. On the downside, a move under 1.1850 would bring the prior yearly high of 1.1829 and 1.1800 into play, with further losses targeting 1.1750 and the 20-day SMA at 1.1704.
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.