- EUR/USD could lose ground amid increased risk aversion ahead of Fed policy decision on Wednesday.
- CME FedWatch tool suggests nearly 100% odds of the Fed maintaining its policy rate within the target range of 4.25%-4.50%.
- Traders expect the European Central Bank to deliver a 25 basis points rate cut at Thursday’s policy meeting.
EUR/USD halts its two-day losing streak, trading around 1.0440 during the Asian hours on Wednesday. However, the pair could continue facing challenges amid risk-off sentiment ahead of the Federal Reserve’s (Fed) interest rate decision scheduled later in the North American session.
The US Dollar (USD) receives support from the Federal Reserve’s (Fed) cautious stance regarding its policy outlook. According to the CME FedWatch tool, market expectations indicate nearly 100% certainty that the Fed will maintain its policy rate within the target range of 4.25%-4.50%. However, traders will be closely monitoring Fed Chair Jerome Powell’s press conference for any hints regarding the future direction of monetary policy.
Moreover, the Greenback gained ground following tariff threats made by US President Donald Trump. Trump announced plans on Monday evening to impose tariffs on imports of computer chips, pharmaceuticals, steel, aluminum, and copper. The goal is to shift production to the United States (US) and bolster domestic manufacturing.
The Euro (EUR) could weaken as traders anticipate the European Central Bank (ECB) will lower its Deposit Facility rate by 25 basis points (bps) to 2.75% on Thursday. This expectation stems from the sluggish economic outlook in the Eurozone and confidence that inflation will sustainably return to the ECB’s 2% target.
With a 25 bps rate cut already priced in, investors will closely monitor President Christine Lagarde’s press conference for insights on how potential tariffs from Trump might influence economic and monetary policy.
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