Euro retreats below 1.1600 with Kevin Warsh and the Fed in focus

The euro (EUR) posted moderate losses against the US dollar (USD) on Wednesday, giving back some of the gains made over the past few days, and markets showed a cautious mood ahead of a decision from the US Federal Reserve (Fed). The EUR/USD pair has returned to levels below 1.1600, but so far remains within Tuesday’s range.

On Wednesday, all eyes are on the outcome of the Federal Market Open Committee (FOMC) meeting, the first under Chairman Kevin Warsh. Warsh was appointed by US President Donald Trump to cut interest rates amid inflation well above the bank’s target and the bank’s independence questioned.

Warsh can skip “Dot Plot”

The Fed is widely expected to leave its monetary policy unchanged, so attention will focus on Warsh’s press release aimed at spotting differences from his predecessor, Jerome Powell, and economic and interest rate projections. Market rumors suggest that Warsh may not participate in the “Dot Plot.”

Earlier, U.S. retail sales data for May are expected to be broadly in line with data released last month. The impact on the US dollar is likely to be minimal.

Meanwhile, markets await further details of the U.S.-Iran trade deal as rivals step up their rhetoric. Iran has vowed a “tough response” if Israel continues to attack Lebanon, and US President Donald Trump told the G7 summit that he is ready to go back to “dropping bombs” if he doesn’t like the deal.

In the euro area, the final May Harmonized Index of Consumer Prices (HICP) confirmed the preliminary data of an boost of 3.2% year-on-year (y/y) and 0.1% month-on-month. On the other hand, the core HICP was revised upwards to an boost of 2.6% y/y, the highest reading in over a year, compared to the previous estimate of 2.5%.

Economic indicator

Fed’s interest rate decision

The Federal Reserve (The Fed) deliberates on monetary policy and decides on interest rates at eight previously scheduled meetings per year. It has two tasks: to keep inflation at 2% and to maintain full employment. Its main tool for achieving this goal is setting interest rates – both those at which it lends to banks and those at which banks lend to each other. If it decides to boost interest rates, the US dollar (USD) will strengthen as it attracts a greater inflow of foreign capital. If it cuts interest rates, it will typically weaken the dollar as capital flows to countries offering higher yields. If rates remain unchanged, attention will focus on the tone of the Federal Open Market Committee (FOMC) announcement and whether it will be hawkish (expecting higher interest rates in the future) or dovish (expecting lower interest rates in the future).

Economic indicator

FOMC press conference

The press conference lasts about an hour and consists of two parts. First of all, the chairman Federal Reserve (The Fed) reads a prepared statement, and then the conference is open to questions from the press. Questions often lead to unscripted answers, which create high market volatility. The Fed holds a news conference after all eight annual policy meetings.