Federal Reserve set for hawkish interest-rate cut as traders dial back chances of additional easing in 2025

• The Federal Reserve is widely expected to lower the policy rate by 25 bps at the last meeting of 2024.
• Fed Chairman Powell’s remarks and the revised dot plot could provide important clues about the interest-rate outlook.
• The US Dollar’s valuation could be impacted significantly heading into the Christmas holiday.  

The US Federal Reserve (Fed) will announce monetary policy decisions following the December policy meeting on Wednesday. Alongside the policy statement, the US central bank will publish the revised Summary of Economic Projections (SEP), also known as the dot plot. 

The CME FedWatch Tool shows that investors are fully pricing in a 25 bps Fed cut, which would bring the policy rate down to the range of 4.25%-4.5%. The market positioning suggests that the US Dollar’s (USD) reaction to the interest-rate decision alone could remain short-lived. Instead, investors will assess the details of the dot plot and scrutinize comments from Fed Chairman Jerome Powell in the post-meeting press conference.

The SEP in September showed that Fed officials' median view of the fed funds rate at the end of 2025 stood at 3.4%. Revisions to interest rate expectations, inflation and growth projections for next year could provide important clues about the policy outlook and influence the USD’s valuation.

Previewing the Fed’s last policy meeting of the year, “the FOMC is expected to announce an additional rate cut, with the Committee easing rates by 25bp to 4.25%-4.50%,” said TD Securities analysts in a recently published report and added: 

“While we think the Fed will remain keen on projecting additional policy easing for 2025, our view is that guidance regarding the pace of rate cuts will be more cautious going forward. This might be interpreted as a hawkish rate cut by market participants.”

When will the Fed announce its interest rate decision and how could it affect EUR/USD?

The US Federal Reserve is scheduled to announce its interest rate decision and publish the monetary policy with the revised dot plot on Wednesday at 19:00 GMT. This will be followed by Fed Chairman Jerome Powell's press conference starting at 19:30 GMT. 

An upward revision to the end-2025 interest-rate projection could be assessed as a hawkish tilt in the policy outlook and trigger a USD rally with the immediate reaction, causing EUR/USD to push lower. On the other hand, a downward revision could have the opposite effect on the pair’s action.

Powell is likely to be asked whether policymakers took US President-elect Donald Trump’s proposed policies, especially regarding tariffs, into account when penciling down their projections for next year.

In case Powell notes that they will take a gradual approach to further policy easing because of the uncertainty created by the potential tariffs on the inflation outlook, the USD could preserve its strength. On the other hand, if Powell downplays inflation jitters and reemphasizes their willingness to keep the labor market strong next year, this could be seen as a dovish tone and make it difficult for the USD to stay resilient against its rivals. In this scenario, EUR/USD could stage a rebound in the near term.

Eren Sengezer, European Session Lead Analyst at FXStreet, provides a short-term technical outlook for EUR/USD:

“EUR/USD remains technically bearish in the near term as it remains within the descending regression channel coming from late September. Additionally, the Relative Strength Index Indicator (RSI) on the daily chart stays near 40, highlighting the lack of buyer interest.”

“On the downside, 1.0400 (static level) aligns as immediate support before 1.0260 (lower limit of the descending channel) and 1.0200 (static level, round level). In case EUR/USD rises above 1.0600, where the Fibonacci 23.6% retracement level of the October-December downtrend is located, and starts using this level as support, sellers could be discouraged. In this scenario, 1.0690-1.0700 (50-day Simple Moving Average, Fibonacci 38.2% retracement) and 1.0800 (Fibonacci 50% retracement) could be seen as next resistance levels.”