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

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EUR/USD trims gains and returns below 1.1600 with all eyes on the Fed.
The US central bank is widely expected to leave rates on hold.
Warsh's press conference and the bank's economic and rate hike projections will be carefully analyzed.

The Euro (EUR) posts moderate losses against the US Dollar (USD) on Wednesday, giving away some of the ground gained over the last few days, with markets showing a cautious mood ahead of the US Federal Reserve’s (Fed) decision. The EUR/USD pair has pulled back to levels below 1.1600 but, so far, remains trading within Tuesday’s range.

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

Warsh might skip the "Dot Plot"

The Fed is widely expected to leave its monetary policy unchanged, and therefore, the focus will be on Warsh’s press release to spot differences with its predecessor, Jerome Powell, and the economic and interest rate projections. Market rumours suggest that Warsh might not participate in the “Dot Plot”.

Before that, US Retail Sales data for May is expected to show figures broadly in line with those released in the previous month. The impact on the US Dollar likely to be minimal.

Meanwhile, markets are awaiting further details from the US-Iran trade deal while rivals ramp up their rhetoric. Iran has vowed a “hard response” if Israel keeps attacking Lebanon, and US President Donald Trump said at the G7 summit that he is ready to go back to “dropping bombs” if he does not like the agreement.

In the Eurozone, May’s final Harmonized Index of Consumer Prices (HICP) confirmed preliminary figures of a 3.2% year-on-year (YoY) growth and a 0.1% uptick on the month. The core HICP, on the other hand, has been revised higher to a 2.6% YoY growth, its highest reading in more than a year, from previous estimations of a 2.5% growth.

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).

Economic Indicator

FOMC Press Conference

The press conference is about an hour long and has two parts. First, the Chair of the Federal Reserve (Fed) reads out a prepared statement, then the conference is open to questions from the press. The questions often lead to unscripted answers that create heavy market volatility. The Fed holds a press conference after all its eight yearly policy meetings.