21.03.202415:04 Forex Analysis & Reviews: EUR/USD: Fed set the dots

The results of the March meeting of the Federal Reserve were not in favor of the dollar. On the one hand, the regulator implemented the basic and most expected scenario, keeping all parameters of monetary policy unchanged. On the other hand, the Fed released a "dovish" dot plot, which coincides with the December forecast (regarding the prospects of rate cuts this year). This decision came as a surprise to dollar bulls—naturally, an unpleasant one.

Reacting to the March verdict, the EUR/USD pair regained almost all the lost points and today has already marked at 1.0944, whereas just yesterday, the price hit a local low at the level of 1.0835. Although buyers of the pair lacked the strength to conquer the 1.10 figure, they achieved the minimum task: extinguished the downward trend observed in the first half of this week.

By and large, the dollar fell victim to exaggerated market expectations, as well as the trading principle of "buy on rumors, sell on news." Last week's inflation reports from the United States played a cruel joke on the greenback. As is known, the Consumer Price Index and the Producer Price Index came out in the "green zone," reflecting an acceleration of inflation (only the core CPI decreased, but the pace of its decline slowed down). This signal inspired dollar bulls, after which the greenback strengthened its positions across the market. Many experts assumed that following the outcome of the first spring meeting, the Fed would revise the dot plot to 2 expected rate cuts this year instead of three.

The updated dot plot was the main intrigue of the March meeting.

The intrigue was resolved not in favor of the American currency. The March forecast of the Federal Reserve implies three cuts this year totaling 75 basis points. The dot plot remained unchanged compared to December, while some economists expected its revision (50 bps instead of 75). However, the forecast for 2025 was indeed revised: now it only accounts for three rounds of rate cuts compared to four in the December forecast.

At the final press conference, Fed Chairman Jerome Powell tried to maintain balance in his rhetoric and did not answer the question about the timing of the first rate cut. Or rather, he formally answered the question but without any specifics. According to him, easing monetary policy will be appropriate "at some point this year." At the same time, he added the standard phrase that the Federal Reserve makes decisions at each meeting separately—depending on the incoming data.

"We must be careful in choosing the timing of the start of rate cuts," said the head of the Fed in response to the corresponding question.

As for the recent inflation reports, Powell speculated that these were just "bumps" on the path to reducing inflation to the target level. At the same time, he noted that wage growth "is gradually decreasing to more sustainable levels."

The accompanying statement text also provides no hints as to under what conditions (and when) the central bank might decide on the first step towards easing monetary policy. The regulator used a set of standard formulations in the final communique, which have been voiced repeatedly. In particular, the central bank does not intend to lower the rate until there is confidence that inflation is steadily moving towards the two percent target level.

Despite the lack of any clear timeframes from the Fed, market participants drew their own conclusions. According to data from the CME FedWatch Tool, the probability of a rate cut at the May meeting is 6%, and at the June meeting, it is 70%. However, just yesterday morning, the chances of a June cut were estimated at 40%.

Thus, the Federal Reserve did not deviate from the course set in December: the total reduction in 2024 is 75 basis points, with the first cut (likely) in June. The latest inflation reports were taken into account but no more than that.

After reaching 1.0944, the EUR/USD pair retreated to the base of the 9th figure, partly due to the corrective pullback of the U.S. dollar index, but mainly due to disappointing PMI indices published today in key EU countries. For example, the business activity index in Germany's manufacturing sector fell again (41.6 points), instead of the expected increase to 43 points. Similarly, the overall European index also entered the red zone: with a forecast growth to 47.0, it came out at 45.7. However, the business activity indices in the service sector (both German and European-wide) were in the green zone, but the euro still came under pressure: buyers of EUR/USD had to postpone the assault on the 1.10 figure.

Considering long positions in the pair is advisable only after the price consolidates above the resistance level of 1.0940 (upper line of the Bollinger Bands indicator on the four-hour chart). In this case, the pair will be above all lines of the Ichimoku indicator, which will form a bullish "Parade of Lines" signal. The targets for the upward movement are the levels of 1.1000 and 1.1050 (upper line of the Bollinger Bands on the W1 timeframe).