EUR/USD trades sideways ahead of Fed policy outcome
- EUR/USD consolidates in a tight range near 1.0500, with investors focusing on the Fed’s policy meeting.
- The Fed is widely expected to cut interest rates by 25 bps but to deliver slightly hawkish remarks on policy guidance.
- ECB’s Rehn said that inflation stabilizing near the central bank’s target of 2% paves the way for more interest rate cuts.
EUR/USD trades in a tight range near the psychological figure of 1.0500 in Wednesday’s European session. The major currency pair consolidates as investors await the outcome of the last Federal Reserve’s (Fed) policy meeting of the year, which will conclude at 19:00 GMT. The Fed will also release the revision of the Summary of Economic Projections (SEP), also known as the dot plot, which shows fresh economic projections and where policymakers see Federal Fund Rates heading in the medium and long term.
Analysts at Bank of America (BofA) expect the Fed to reduce interest rates by 25 basis points (bps) to the 4.25%-4.5% range. The CME FedWatch tool also shows that market participants have fully priced in a 25 bps interest rate reduction.
With traders fully pricing in a standard rate cut announcement, investors will focus primarily on Fed Chair Jerome Powell’s press conference on interest rate guidance. BofA analysts expect Powell to signal a gradual rate-cut approach ahead, potentially indicating a pause in January if economic data meets expectations.
Meanwhile, traders are also confident that the Fed will leave interest rates unchanged at 4.25%-4.50% in January, according to the CME FedWatch tool.
Ahead of the Fed policy decision, the US Dollar (USD) shows a muted price action, with the US Dollar Index (DXY) wobbling near 107.00.
Daily digest market movers: EUR/USD remains muted with Fed policy in focus
- EUR/USD trades on the sidelines due to consolidation in the US Dollar ahead of the Fed’s policy decision. Meanwhile, the Euro’s (EUR) outlook remains bearish as investors expect the European Central Bank (ECB) to head to the neutral rate, which officials have forecasted around 2%, by the first half of 2025.
- Traders expect the ECB to reduce interest rates at every meeting till June 2025. Officials are highly concerned about growing economic risks in the Eurozone and are confident that price pressures will sustainably return to the central bank’s target next year.
- On Tuesday, ECB policymaker and Finnish central bank Governor Olli Rehn said that inflationary pressures stabilizing near the bank’s target of 2% set the stage for further interest rate reduction. Rehn refrained from providing a specific rate cut path and said, “The speed and scale of the rate cuts will be determined in each meeting on the basis of incoming data and comprehensive analysis.”
- When asked about how the continent will face incoming tariff hikes from the US President-elect Donald Trump administration, Rehn said, "Negotiation is preferable, and the European Union's (EU) negotiating position can be strengthened by demonstrating in advance that it is ready to take countermeasures if the United States threatens Europe with higher tariffs.”
Technical Analysis: EUR/USD consolidates around 1.0500
EUR/USD has traded back and forth around the psychological figure of 1.0500 over the last five trading days. The major currency pair faces pressure near the 20-day Exponential Moving Average (EMA), which trades around 1.0535, suggesting that the near-term trend is bearish.
The 14-day Relative Strength Index (RSI) revolves around 40.00. The bearish momentum should trigger if the RSI (14) falls below that level.
Looking down, the two-year low of 1.0330, reached on November 22, will provide key support. Conversely, the December 6 high of 1.0630 will be the key barrier for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.