Euro trades with caution against US Dollar ahead of Fed’s policy meeting
- EUR/USD edges down to near 1.1535 in the countdown to the Fed’s policy outcome.
- The Fed is widely anticipated to hike interest rates by 25 bps to the 3.75%-4.00% range.
- The ECB is expected to deliver one more interest rate hike this year.
The Euro (EUR) trades subduedly at around 1.1535 against the US Dollar (USD) during the European trading session on Wednesday. The major currency pair trades cautiously ahead of the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT.
The CME FedWatch tool shows that the odds of the Fed hiking interest rates by 25 basis points (bps) to 3.75%-4.00% at the policy meeting later in the day are 92.5%.
This suggests that the Fed will break its five-meeting hold streak and kick-off the monetary tightening cycle.
With the Fed looking almost certain to tighten monetary conditions, market reaction would be majorly influenced by the monetary policy statement and Chairman Kevin Warsh’s remarks on inflation and the economic outlook.
In the policy meeting, investors will also focus on Fed’s dot plot, which shows where policymakers see interest rates heading in the near term.
According to the CME FedWatch tool there is an almost 79% chance that the Fed will deliver at least two interest rate hikes by the year-end.
On the Eurozone front, European Central Bank (ECB) officials have signaled that inflationary pressures could remain higher and prompt the need of more interest rate hikes this year. Last week, the ECB raised its policy rates by 25 bps, as expected.
EUR/USD Technical Analysis
In the daily chart, EUR/USD trades at 1.1532, keeping a bearish near-term tone as it holds below the 20-period exponential moving average (EMA) at 1.1589.
The pair has retreated from recent highs and the Relative Strength Index (14) around 40 hints at persistent downside pressure rather than an oversold extreme, suggesting sellers remain in control while the recovery attempts are capped by nearby dynamic resistance.
On the topside, the 20-period EMA at 1.1589 is the first resistance to clear for bulls to ease the current downward bias, with a sustained break above that level needed to suggest a more meaningful rebound. On the downside, the psychological figure of 1.1500 is the key support level.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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