Euro-Dollar Suffers Significant Losses Following Federal Reserve Decision

Above: Chair Powell answers reporters' questions at the FOMC press conference on March 22, 2023.

The Dollar rallied after the Federal Reserve effectively said it would only cut interest rates twice in 2025.

The Euro to Dollar (EUR/USD) recorded its lowest daily close (1.0351 | - 1.32%) in two years after the Fed sent an unambiguous message that it won't be cutting interest rates in January.

In fact, the Federal Open Market Committee (FOMC) 's new projections showed that its members will see only two cuts in 2025.

Stocks fell and U.S. bond yields rose in response to the unexpectedly 'hawkish' developments, which in turn boosted the Dollar.

"There might only be 6 days until Christmas, but markets still had time for another surprise yesterday, as a hawkish cut from the Fed saw the S&P 500 (-2.95%) post its biggest decline after a Fed meeting since 2001," says Henry Allen, a strategist at Deutsche Bank.

The impact on bond and FX markets was significant as investors see U.S. bond yields standing at superior levels to elsewhere, which will ensure international investors funnel money into the U.S. to take advantage of better returns on bonds.

The yield on the 10-year U.S. Treasury bond rose +11.5 basis points and closed above 4.5% for the first time since May. By contrast, the rate on similar German debt is 2.29%.

Andrea Cicione, a strategist at TS Lombard, says pausing the easing cycle will see short-term differentials with the Eurozone diverge, "boosting the appeal of USD."

The FOMC's projections for future interest rates are contained on a dot plot chart, where each member of the FOMC predicts the level they think will be appropriate in the future.

Analysts watch for changes in the dot plot chart as this signals a shift in opinion at the Fed.

The latest projection sees 50bp in cuts for the entirety of 2025 (two x 25bp), down from 100bp in September and less than the 75bps expected by consensus.

Investment bank EUR/USD consensus forecasts: The end-2024 and 2025 guide from Corpay has been released. Featuring the median, mean, high and low points forecasted by over 30 investment banks. Please request a copy here.

The long-run median dot moved up to 3.0%, implying a higher level at which the cycle ultimately ends.

The shift lower from 75bp to 50bp in consensus expectations is reflected in rising U.S. bond yields and the Dollar.

Equity markets don't like this either, as it implies less easy money from the Fed to bolster the economy and fund the stock bull rally.

Economic projections were upgraded, with 2025 PCE inflation now seen at 2.5% (vs. 2.1% before). Most FOMC members now see the risks to core PCE as tilted to the upside, and Cleveland Fed President Hammack voted against the rate cut altogether.

Chair Jerome Powell by said that the latest rate cut "was a closer call", and they were "at a point at which it would be appropriate to slow the pace of rate cuts".

He said the Fed wants to see more "progress on inflation" before cutting interest rates further and said they were "not going to settle" for inflation staying above 2%.

Markets are now ready for an extended pause, which sets the Dollar on a higher plane in 2025.