Euro trades cautiously against US Dollar ahead of expected Fed rate hike

• EUR/USD consolidates near a one-month low as the US Dollar holds firm ahead of the Fed decision.
• A 25-basis-point rate hike is almost fully priced in, shifting attention to the dot plot and Warsh’s remarks.
• The ECB also keeps the door open to more rate hikes if inflation fails to cool.

EUR/USD consolidates losses on Wednesday as traders avoid taking strong directional positions ahead of the Federal Reserve’s (Fed) monetary policy announcement. At the time of writing, the pair trades around 1.1537, little changed on the day and not far from the one-month low of 1.1523, touched on Monday.

The Fed will announce its decision at 18:00 GMT, followed by Fed Chairman Kevin Warsh’s press conference at 18:30 GMT. The US Dollar (USD) holds firm near two-week highs as traders almost fully price in a 25-basis-point rate hike, which would lift the federal funds target range to 3.75%-4.00%.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 99.70.

The expected move comes as the energy shock caused by the war in the Middle East threatens to keep inflation above the Fed’s 2% target. The latest Consumer Price Index (CPI) rose 0.4% MoM in August, while annual inflation held at 3.4%. Core CPI increased 0.3% during the month, while the Producer Price Index (PPI) also rose 0.4%.

Other economic data have also supported the case for tighter policy. The strong August Nonfarm Payrolls (NFP) report points to a stable labour market. Meanwhile, Data released earlier on Wednesday showed Retail Sales rose 1.2% MoM in August, beating expectations of a 0.8% increase and rebounding from a revised 0.5% decline in July.

However, with a quarter-point move almost fully priced in, the immediate interest-rate decision may have a limited effect on EUR/USD. Attention will instead turn to the updated Summary of Economic Projections, including the dot plot, and Warsh’s comments about the future policy path. The Fed’s June dot plot showed a median year-end rate projection of 3.8%, consistent with a one-quarter-point increase in 2026.

A hawkish Fed message indicating that inflation risks remain elevated and more rate hikes are coming could boost the US Dollar and push EUR/USD lower. Conversely, a surprise hold or a dovish hike could weaken the Dollar and help the pair recover.

Across the Atlantic, the European Central Bank (ECB) has raised interest rates twice this year as policymakers try to curb Oil-driven inflationary pressure. Markets expect additional tightening, although the central bank has reiterated that it is not committed to a preset rate path and that future decisions will depend on incoming data. This suggests that more rate hikes could follow if inflation fails to cool.

Analysts at BNY expect the ECB’s Governing Council to proceed cautiously after September, noting that “the Governing Council will likely decide meeting by meeting after September, and opinions are already split.” They highlight that “some members favor waiting until December while others are pushing for more preemptive action as energy prices continue to rise,” underscoring the internal debate over how aggressively to respond to the latest energy shock.

In BNY’s view, “data don’t support a strong domestic-demand story to drive core inflation and second-round effects,” limiting the case for further aggressive tightening. The bank also stresses that “higher rates can’t produce energy; they can only deepen the terms-of-trade shock,” arguing that while “ECB vigilance is warranted,” this “doesn’t make another increase automatic.”