Anna 
The EUR/USD pair fluctuated between modest gains and losses on Wednesday, consolidating in the upper 1.0800s after rebounding from Tuesday’s lows near 1.0830, fueled by heightened expectations of potential interest rate cuts by the Federal Reserve (Fed) before June.
Interest rates, pivotal in forex dynamics, sway currency values, with lower rates typically depreciating a currency due to decreased foreign capital inflows, and vice versa for higher rates.
EUR/USD Rebounds Amid Rising June Rate Cut Bets
EUR/USD managed a slight recovery ahead of the Federal Reserve’s March Federal Open Market Committee (FOMC) meeting, the results of which are slated for announcement at 18:00 GMT. Growing speculation of Fed rate cuts, presently at 5.25%-5.50% for the Fed Funds Rate, by June has bolstered market sentiment.
The CME FedWatch Tool, utilizing Fed Fund Futures, indicates a 64.0% probability of rate cuts by June and 78.9% by July, up from Tuesday’s 55.1% and 73.7%, respectively. This shift in expectations likely contributed to the EUR/USD rebound.
Fed Outlook Revision Sparks Volatility
While the Fed isn’t anticipated to adjust rates at this meeting, revisions to quarterly forecasts and accompanying statements could reshape rate expectations and consequently USD valuation. Following the meeting, EUR/USD might experience heightened volatility.
Speculation is rife that the Fed may revise its economic forecasts in the Summary of Economic Projections (SEP) and the “dot plot,” potentially indicating fewer rate cuts in 2024 due to sustained inflation pressures.
David Doyle, head of economics at Macquarie, suggests a potential shift towards a less dovish stance, indicating a risk of fewer projected cuts in 2024.
ECB Commentary Influences Sentiment
In Europe, discussions on potential rate cuts have sparked debate, with proponents split between those advocating for a decision at the European Central Bank’s (ECB) June meeting and those pushing for earlier action.
ECB Vice-President Luis de Guindos reiterated allegiance to the June camp, citing persistently high services inflation.
Wednesday’s lineup includes speeches from ECB President Christine Lagarde, Chief Economist Philip Lane, and Executive Board member Isabel Schnabel. Additionally, Bundesbank President Joachim Nagel will address the “Future of European Finance” conference, potentially influencing EUR/USD volatility.
