Why is the Fed's hawkish cut unsettling AUD/USD, EUR/USD, GBP/USD and USD/JPY?
The Federal Reserve's hawkish tone following a 25-basis-point rate cut has jolted major currency pairs, pushing the US dollar and yields significantly higher.
How the Fed's decision impacts major currency pairs
The Federal Open Market Committee (FOMC) meeting outcome has sent shockwaves through the forex trading markets, affecting AUD/USD, EUR/USD, GBP/USD, and USD/JPY pairs.
The immediate market reaction saw the US dollar strengthen across the board, with the forex market responding sharply to the Federal Reserve's (Fed) more restrictive stance regarding 2025 and beyond. Major currency pairs experienced heightened volatility, with AUD/USD, EUR/USD and GBP/USD declining while USD/JPY pushed higher, demonstrating the significant impact of the Fed's hawkish tone.
Forex trading platforms saw increased activity as traders adjusted their positions in response to the changing monetary policy landscape.
Understanding the Fed's rate decision
The FOMC delivered its anticipated 25 basis point (bp) cut, bringing the Federal Reserve Funds interest rate to a range of 4.25% to 4.50%. Notably, the Fed signalled a slower pace of easing in 2025, projecting just two 25 basis point cuts compared to the four previously forecast. The revised projections proved more hawkish than most market participants had anticipated, particularly impacted major currency pairs, with traders reassessing their positions across AUD/USD, EUR/USD, GBP/USD, and USD/JPY.
US dollar strength and cross-currency implications
The dollar's surge has created significant pressure on major currency pairs, with AUD/USD slipping to 2 ¼ year lows and fast approaching the October 2022 low at $0.6171. If it were to give way, the October 2008 low at $0.6009 would represent the next downside target.
AUD/USD monthly chart
EUR/USD
EUR/USD is testing key support around the January 2017 $1.0341 low and the November 2024 $1.0333 low. These support level may soon give way, in which case the psychological $1.0000 mark will be back in play and perhaps also the September 2022 trough at $0.9536.
EUR/USD monthly chart
GBP/USD
GBP/USD is also showing increased volatility whilst keeling over from its $1.3434 September peak. Despite being on track for its third straight month of falling, the cross looks to be more stable than AUD/USD or EUR/USD.
GBP/USD monthly chart
USD/JPY
The October 2016, January 2017, September 2019, May 2020, March and October 2023 lows at $1.2077 to $1.1804 should offer solid support in case of further downside being witnessed. The forex market is now pricing in just 32 basis points of rate cuts for 2025, down from 50 basis points previously expected.
USD/JPY has shown particular sensitivity to the Fed's stance, given the stark monetary policy divergence between the Fed and the Bank of Japan (BoJ) which maintained its short-term interest rate at around 0.25% during its final meeting of the year.
USD/JPY is on track for the ¥160.00 region and its ¥161.95 July 2024 peak. If overcome, the November 1986 high at ¥165.00 may also be reached in 2025. The next full US rate cut isn't anticipated until September 2025, suggesting prolonged dollar strength could continue to influence currency trading.
USD/JPY monthly chart
Market expectations and economic indicators
Recent warm US inflation data and robust economic activity indicators had suggested this hawkish outcome was possible. The Fed's revised outlook included a lower unemployment rate and higher forecasts for both gross domestic product (GDP) and core inflation, supporting the more restrictive stance.
Remember that currency pairs can be particularly volatile during central bank announcements, so proper risk management is essential.
This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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