Euro steadies near 17-month lows ahead of Fed rate verdict
- EUR/USD edges higher as the US Dollar eases ahead of the Fed’s interest rate decision.
- The Fed is expected to keep rates unchanged, with December rate hike expectations in focus.
- France’s budget crisis keeps the Euro vulnerable, with the ECB’s monetary policy announcement due Thursday.
EUR/USD trades with a positive bias during American trading hours on Wednesday as the US Dollar (USD) pauses its advance ahead of the Federal Reserve’s (Fed) monetary policy decision, due at 18:00 GMT. At the time of writing, the pair trades around 1.1134 after briefly dipping to 1.1113, its lowest level since May 2025.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 102.33 after reaching a fresh two-week high of 102.49 earlier in the day.
The Fed is widely expected to leave interest rates unchanged at 3.75%-4.00% after delivering a 25-basis-point (bps) hike in September. For traders, the question is whether the Fed will give them a reason to keep betting on a December rate hike, as policymakers remain committed to bringing inflation back to the central bank’s 2% target.
Inflation risks remain tilted to the upside amid persistent tensions in the Middle East. Oil prices rebound after two days of losses following a Wall Street Journal report that Washington had warned Gulf states of a possible military operation against Iran after the US midterm elections.
Traders currently price in an 85% probability of a rate hike in December, according to the CME FedWatch Tool. Signals that further tightening remains on the table could help the US Dollar resume its advance and weigh on the Euro. However, less hawkish remarks could prompt traders to scale back those bets, giving EUR/USD room to recover.
Analysts at ING highlight that EUR/USD "remains at the lows of the year as broad dollar strength and an unresolved French budget crisis dominate,". Strategists at Societe Generale add that the Euro "really hasn’t been able to manage much of a bounce, regardless of shorts," noting that "energy prices, fiscal concerns and social unrest have all weighed" on the single currency.
They argue that "if the FOMC message (whatever that looks like in the brave new world) keeps December hike expectations alive, our bias is to remain dollar-positive, and unless the ECB is very hawkish, European economic fundamentals will weigh," leaving the Euro vulnerable if US policy expectations stay supportive of the Dollar.
The European Central Bank (ECB) announces its monetary policy decision on Thursday and is widely expected to leave its deposit rate unchanged at 2.50%, having already raised rates by a cumulative 50 bps this year. Traders will look for clues about a possible December hike and how policymakers assess the balance between persistent energy-driven inflation and risks to growth.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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