The United States (US) Federal Reserve (Fed) is set to announce its latest monetary policy decision on Wednesday, alongside the revised Summary of Economic Projections (SEP), widely known as the dot plot.
Markets broadly anticipate the central bank will deliver its first rate cut since last December, lowering the policy rate to a 4.00%-4.25% range.
Market expectations ahead of the Fed decision
The CME FedWatch Tool indicates investors see only a 6% probability of a larger move, while pricing in an 80% chance of a cumulative 75-basis-point (bps) reduction before year-end. This implies markets expect three consecutive 25 bps cuts at each of the remaining meetings, unless an outsized move occurs.
The June SEP projected 50 bps of cuts in 2025, followed by 25 bps in both 2026 and 2027—significantly less than current market pricing. At that time, seven of 19 Fed officials anticipated no cuts in 2025, while others projected between one and three reductions.
Weaker labor data shifts outlook
Since June, a softer labor market has reshaped expectations. August Nonfarm Payrolls grew by only 22,000, while the unemployment rate rose to 4.3%. Moreover, a preliminary benchmark revision revealed that total Nonfarm employment in March 2025 was 911,000 lower than previously reported.
In his August 22 remarks at the Jackson Hole Symposium, Fed Chair Jerome Powell acknowledged rising risks to the labor market while suggesting that tariff-driven inflation pressures would likely prove temporary.
This backdrop suggests that the Fed’s mandate to support maximum employment may temporarily outweigh its price stability objective.
“Future guidance is likely to lean dovish as a result of the recent weak labor reports, but not overly so given an inflation overshoot remains a key risk,” TD Securities analysts said, adding that the updated SEP may still show two cuts in 2025 but with projections shifting in a slightly hawkish direction.
Political developments add uncertainty
The Fed’s outlook could also be influenced by recent political developments. On Monday, Senate Republicans confirmed Stephen Miran—viewed as dovish—to the Fed’s Board of Governors. Miran is expected to vote at this week’s meeting and may support a more aggressive 50 bps cut.
Meanwhile, Fed Governors Michelle Bowman and Christopher Waller, a potential successor to Powell, could also lean dovish as they did in July. Governor Lisa Cook, whose seat was contested, is now expected to participate after an appeals court rejected a legal challenge to her position.
When and how the decision could impact EUR/USD
The Fed will release its decision and updated SEP at 18:00 GMT, followed by Powell’s press conference at 18:30 GMT.
The USD reaction will depend on both the size of the cut and forward guidance:
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A surprise 50 bps cut could initially weigh heavily on the USD, though a justification framed as frontloading might limit further downside.
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A standard 25 bps cut could still weaken the dollar if the SEP signals multiple cuts in 2025.
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Conversely, if the dot plot projects only one or two cuts, the USD could find support.
Market focus will also turn to Powell’s tone. Concern over labor market conditions would likely pressure the dollar, while a firm emphasis on inflation risks could provide support.
Deutsche Bank analysts expect the updated SEP to reflect 75 bps of total reductions in 2025, compared with 50 bps in June. “This meeting could see multiple dissents from both hawkish and dovish sides, potentially the first such occurrence since 2019,” they noted.
EUR/USD technical outlook
“The RSI on the daily chart holds above 50 as the pair trades above the 20-day and 50-day SMAs. Resistance is located at 1.1830, followed by 1.1900 and 1.2000. On the downside, support is seen at 1.1680-1.1660, before 1.1540.”
