Results of December FOMC Meeting

[Ben Graham]

The US dollar found itself under pressure again after representatives of the Federal Reserve lowered the interest rate for the third consecutive time and maintained their forecast for only one more rate cut in 2026 and another in 2027.

On Wednesday, the Federal Open Market Committee voted 9 to 3 to reduce the federal funds rate by a quarter percentage point to a range of 3.5% to 3.75%. The committee also made minor adjustments to its statement, indicating greater uncertainty about when the next rate cut might occur. This put pressure on the US dollar, although not as significantly as many traders had anticipated.

While the rate cut was expected, it sparked a wave of discussion among analysts. There are concerns that further easing of monetary policy could lead to heightened inflation, which, despite the Fed's efforts, continues to remain above the target level of 2%. Some experts believe that a more cautious approach to rate cuts would have been wiser, as two Fed officials stated after the meeting. President of the Kansas City Federal Reserve, Jeff Schmid, and President of the Chicago Federal Reserve, Austan Goolsbee, both advocated for keeping rates unchanged.

Nonetheless, the Fed maintains that a modest rate cut is necessary to support economic growth amid slowing labor market momentum.

In a post-meeting conversation with journalists, Chairman Jerome Powell suggested that the Fed has taken sufficient measures to strengthen the economy despite employment threats, while keeping interest rates at a sufficiently high level to continue applying pressure on prices. He stated that further normalization of their policy should help stabilize the labor market and enable inflation to return to a downward trend towards 2%.

When asked whether a rate reduction was a necessary condition, Powell avoided a direct answer but added that he does not consider changes in rates as a baseline scenario.

Currently, investors and traders have adjusted their forecasts for interest rate cuts next year from three to two. The disagreements and forecasts presented on Wednesday highlight the debates among policymakers regarding what poses a greater threat to the US economy: weakness in the labor market or persistent inflation.

The current unemployment rate stands at 4.4%, up from 4.1%. Prices, according to the Fed's preferred inflation measure, have increased by 2.8% year-over-year as of September, significantly above the central bank's target of 2%.

In their new economic projections, officials indicate one rate cut in 2026 and another in 2027. However, the outlook for interest rates remains highly contentious. Seven officials expressed support for maintaining rates at their current level throughout 2026, while eight supported at least two rate cuts. The Fed also raised its economic growth forecast for 2026 to 2.3% from the previously anticipated 1.8%. They predict inflation to decrease to 2.4% next year from 2.6%.

The decision to lower interest rates exerted pressure on the dollar.

Regarding the current technical outlook for EUR/USD, buyers now need to focus on reclaiming the level of 1.1710. Achieving this will allow them to target a test at 1.1725. From there, they could aim for 1.1750, although doing so without support from major players could prove challenging. The ultimate target will be the peak at 1.1777. In the event of a decline, I expect significant action from major buyers around the 1.1675 level. If there is no activity there, it would be wise to wait for a new low at 1.1650 or to open long positions from 1.1615.

For the current technical outlook for GBP/USD, pound buyers need to reclaim the nearest resistance at 1.3390. This will enable them to target 1.3420, above which breaking through may be quite difficult. The further target will be the area around 1.3440. Should the pair decline, bears will attempt to take control at the 1.3350 level. If successful, a breakdown of this range could significantly undermine bullish positions, pushing GBP/USD down to a low of 1.3320 with the potential to reach 1.3285.

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