The Federal Reserve’s interest rate decision can significantly impact the EURUSD exchange rate. Here’s how:
Interest Rate Hike:
- Generally strengthens the US dollar (USD). Higher interest rates in the US make dollar-denominated investments more attractive to foreign investors, increasing demand for USD and driving its price up relative to the Euro (EUR).
Interest Rate Cut:
- Generally weakens the USD. Lower interest rates make USD-denominated investments less appealing, decreasing demand for USD and pushing its price down relative to EUR.
Current Situation (as of June 13, 2024):
- The Fed is expected to maintain current interest rates (5.25% – 5.50%) based on recent economic data.
- The focus will likely be on the Fed’s future policy direction reflected in the economic projections (dot plot).
Impact on EURUSD:
- If the Fed maintains rates and the dot plot suggests a dovish tilt (leaning towards future rate cuts), the USD could weaken, potentially strengthening the EURUSD exchange rate.
- Conversely, a hawkish dot plot hinting at continued high rates or even increases could strengthen the USD and weaken EURUSD.
Remember: The market reaction is based on expectations and surprises. If the Fed’s decision aligns with expectations, the impact might be muted. However, any unexpected moves or hawkish/dovish signals in the dot plot could cause significant fluctuations in EURUSD.