Federal Reserve set to hold interest rate as bets rise on June cut

• The Federal Reserve is expected to leave the policy rate unchanged for the fourth consecutive meeting.
• Fed Chairman Powell will speak on the policy outlook in a press conference.
• The US Dollar could stay resilient against its rivals if the Fed keeps its focus on the inflation outlook.

The United States (US) Federal Reserve (Fed) will announce monetary policy decisions following the May policy meeting on Wednesday. Market participants widely anticipate the US central bank will leave policy settings unchanged for the fourth consecutive meeting, after cutting the interest rate by 25 basis points (bps) to the 4.25%-4.5% range in December.

The CME FedWatch Tool shows that investors virtually see no chance of a rate cut in May, while pricing in about a 30% probability of a 25 bps reduction in June. Hence, market participants will scrutinize the changes in the policy statement and comments from Fed Chairman Jerome Powell in the post-meeting press conference for fresh hints on the timing of the next rate cut.

Before the Fed went into the blackout period, several policymakers voiced their concerns over the uncertainty created by the US' new trade regime weighing on the labor market.

Minneapolis Fed President Neel Kashkari said that some businesses indicate that they are preparing for possible job cuts if uncertainty continues. Similarly, Fed Governor Christopher Waller told Bloomberg that he wouldn't be surprised to see more layoffs and higher unemployment, adding that rising unemployment could pave the way for rate cuts. As the Bureau of Labor Statistics reported that Nonfarm Payrolls rose by 177,000 in April, surpassing the market expectation of 130,000, and the Unemployment Rate remained unchanged at 4.2%, investors turned reluctant to price in a rate cut in June.

Previewing the Fed's May meeting, analysts at Danske Bank said, "We expect the Fed to maintain its monetary policy unchanged in the May meeting, in line with consensus and market pricing."

"While we expect the Fed to resume cutting rates in June, we doubt Powell will opt for clear forward guidance amid the tariff uncertainty. Growth risks remain tilted to the downside, but rising inflation expectations are still a concern," the analysts added.

When will the Fed announce its interest rate decision and how could it affect EUR/USD?

The US Federal Reserve is scheduled to announce its interest rate decision and publish the monetary policy statement on Wednesday at 18:00 GMT. This will be followed by Fed Chairman Jerome Powell's press conference starting at 18:30 GMT.

Investors will pay close attention to how the Fed and Chairman Powell assess the latest economic developments. Although the April employment report showed that conditions in the labor market remain relatively healthy, the Bureau of Economic Analysis reported in its flash estimate that the US' Gross Domestic Product (GDP) contracted at an annual rate of 0.3% in the first quarter.

In case the Fed acknowledges a heightened risk of a recession and its potential negative impact on hiring, investors could see that as a dovish language. In this scenario, the US Dollar (USD) could come under renewed selling pressure. On the other hand, investors could refrain from pricing in a rate cut in June and help the USD outperform its rivals, if the Fed downplays growth concerns and implies that it will remain patient about policy adjustments while waiting to see how tariffs will impact inflation.

Eren Sengezer, European Session Lead Analyst at FXStreet, provides a short-term technical outlook for EUR/USD:

"The near-term technical outlook points to a loss of bullish momentum, with the Relative Strength Index (RSI) indicator on the daily chart retreating toward 50. Additionally, EUR/USD trades near the 20-day Simple Moving Average (SMA) after holding comfortably above this level throughout April."

"On the downside, the Fibonacci 23.6% retracement level of the uptrend that started in January forms key support at 1.1200. In case EUR/USD makes a daily close below this level and starts using it as resistance, technical sellers could remain interested, opening the door for an extended slide toward 1.1015-1.1000 (Fibonacci 38.2% retracement, round level, 50-day SMA) and 1.0860 (Fibonacci 50% retracement). Looking north, interim resistance could be spotted at 1.1440 (static level) before 1.1520 (end-point of the uptrend) and 1.1600 (round level, static level)."