Euro remains on the defensive ahead of Fed and ECB interest rate decisions

• EUR/USD extends losses for a fifth straight day as the US Dollar strengthens.
• France’s fiscal concerns keep the Euro under pressure against its major peers.
• Traders await the Fed and ECB interest rate decisions.

EUR/USD remains on the back foot on Tuesday as the Euro (EUR) underperforms across the board amid concerns over France’s public finances, while a firmer US Dollar (USD) adds pressure. At the time of writing, the pair trades around 1.1145, extending losses for a fifth consecutive day.

The US Dollar regains ground as last week’s AI-related worries subside, allowing traders to refocus on the Federal Reserve’s (Fed) interest rate outlook. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 102.20, near a two-week high, after falling to 101.45 last week, its lowest level since October 1.

Traders also digest second-tier US economic data. CB Consumer Confidence rises to 91.7 in October, beating the 81.0 forecast and September’s upwardly revised 84.2. Durable Goods Orders increase 1.8% in September, above the expected 0.6%, though orders excluding transportation slightly miss forecasts. Meanwhile, ADP’s four-week average of job gains eases to 16.8K from 17.5K.

The Fed announces its monetary policy decision on Wednesday and is widely expected to keep rates unchanged at 3.75%-4.00%. The central bank raised rates by 25 basis points (bps) in September, its first increase since 2023, as higher energy costs linked to the war in the Middle East added to inflation pressures.

With inflation still above the Fed’s 2% target and Middle East risks lingering, traders will watch whether the policy statement and Chair Kevin Warsh’s comments reinforce or temper expectations of a December rate hike, currently priced at around 80%, according to the CME FedWatch Tool.

On the European side, the European Central Bank (ECB) announces its decision on Thursday. Policymakers are expected to hold the deposit rate at 2.50% after raising rates by a cumulative 50 bps this year.

Brown Brothers Harriman (BBH) argue that “contained Eurozone underlying inflation and tighter financial conditions give policymakers scope to wait.” Even so, BBH cautions that “resilient economic activity and inflation projected to remain above target for an extended period keep a December rate hike to 2.75% firmly in play (75% priced in).”

BBH also flags that “France’s bond market turmoil is likely to dominate ECB President Christine Lagarde’s press conference.” The bank believes that “reassurance that the ECB stands ready to contain unwarranted contagion can cushion EUR, but France’s fiscal troubles leave EUR/USD vulnerable to a decline toward 1.1000.”