EUR/USD holds onto gains ahead of Fed’s monetary policy decision
- EUR/USD grips gains near 1.1370 as the US Dollar trades subduedly ahead of the Fed’s monetary policy decision.
- Investors will focus on the Fed’s guidance on the monetary policy outlook.
- Conservative leader Merz was sworn in as German Chancellor in his second attempt.
EUR/USD clings to the previous day’s gains around 1.1370 during European trading hours on Wednesday. The major currency pair trades firmly as the US Dollar (USD) ticks down ahead of the Federal Reserve’s (Fed) interest rate decision at 18:00 GMT. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades with caution inside Tuesday’s range around 99.40.
According to the CME FedWatch tool, traders have fully priced in that the Fed will leave interest rates steady in the current range of 4.25%-4.50%. Investors will pay close attention to the monetary policy statement and Fed Chair Jerome Powell’s press conference to get fresh cues about how long the central bank will maintain a restrictive monetary policy stance.
Fed officials have indicated that monetary policy adjustments are not appropriate until they see cracks in the labor market and economic growth, as consumer inflation expectations have de-anchored due to the fallout of new economic policies by United States (US) President Donald Trump.
April’s Nonfarm Payrolls (NFP) data showed steady job growth, a limiting factor for the Fed in reducing interest rates. Meanwhile, the US economy contracted by 0.3% in the first quarter of the year, but the reason was the significant surge in imports frontloaded by US business owners to avoid the impact of higher tariffs.
Contrary to the Fed’s guidance, President Trump has repeatedly urged the central bank, especially Jerome Powell, to lower interest rates. Trump also threatened to discharge Powell from his duties for not reducing borrowing costs despite easing energy prices, food items, etc.
Apart from the Fed policy, the US-China trade talks in Geneva are a major trigger for the US Dollar. US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer confirmed on late Tuesday that they will meet their Chinese counterparts for trade discussions. Investors see this as a constructive step towards de-escalation in the Sino-US trade war, which has supported S&P 500 futures.
Daily digest market movers: EUR/USD trades firmly as Merz sworn in as German Chancellor
- EUR/USD demonstrates strength as the Euro (EUR) trades firmly after Conservative leader Friedrich Merz was sworn in as Chancellor of Germany in the second attempt. Merz failed to secure an absolute majority in the first attempt despite CDU/CSU and Social Democrats collectively having a vote bank of 326. Merz received 310 votes in the first attempt, six fewer than the 316 required to be elected as German Chancellor.
- The confirmation of Friedrich Merz as Chancellor has diminished fears of political instability and is expected to boost defense spending measures approved in March. This scenario would strengthen the German economy and favor the Euro and German assets.
- However, the upside in the Euro appears to be limited as the European Central Bank (ECB) is set to continue easing the monetary policy in the June meeting. The ECB is almost certain to cut its key interest rates again next month as officials are more focused on absorbing economic shocks in the face of tariffs announced by US President Trump than Eurozone inflation, which is expected to return to the central bank’s target of 2% this year
- On the global front, the European Union (EU) Commission is actively considering measures to offset the impact of higher tariffs by the US. On Tuesday, EU Trade Commissioner Maros Sefcovic stated that the continent is exploring countermeasures while Trump has delayed reciprocal tariffs by 90 days. However, Sefcovic clarified that the foremost priority of the EU is trade resolution with the US. A Bloomberg report showed on Tuesday that the EU plans to hit about 100 billion Euros worth of US goods with additional tariffs if trade talks fail to deliver a satisfactory result for the bloc.
Technical Analysis: EUR/USD holds key 20-day EMA
EUR/USD trades firmly near 1.1370 on Wednesday, while the 20-day Exponential Moving Average (EMA) around 1.1270 continues to act as a major support for the pair.
The 14-day Relative Strength Index (RSI) falls inside the 40.00-60.00 range, indicating that the bullish momentum is concluded for now. However, the upside bias still prevails.
Looking up, the psychological level of 1.1500 will be the major resistance for the pair. Conversely, the 25 September high of 1.1214 will be a key support for the Euro bulls.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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