Danske provides insights into the potential outcomes of the upcoming Federal Reserve's FOMC meeting and its implications for EUR/USD currency pair.
Fed's Policy Status:
- The Federal Reserve is expected to keep its monetary policy unchanged at the January meeting, with the first rate cut anticipated in March, followed by a total of four cuts throughout 2024.
Dual Mandate Balance:
- The Fed currently balances two objectives: managing cooling inflation, which justifies a move towards a neutral rate, and maintaining solid economic growth and labor markets, which supports a gradual approach to policy changes.
Focus on Quantitative Tightening (QT):
- The Fed is also shifting attention towards adjusting the endgame for its QT process, expected to continue at least until the end of the year.
Impact on EUR/USD:
- Given these factors, Danske predicts risks are leaning towards slightly higher yields in the U.S. and a corresponding decrease in the value of EUR/USD around the time of the FOMC meeting.
Danske anticipates the upcoming FOMC meeting to maintain the status quo in terms of monetary policy, but with a gradual approach towards easing. This scenario is likely to result in a slight dip in EUR/USD, influenced by marginally higher U.S. yields and market reactions to the Fed's policy direction.