The EUR/USD pair is holding onto positive territory, trading near 1.0505 during the early European session on Wednesday. However, market sentiment remains cautious ahead of the Federal Reserve’s (Fed) interest rate decision, which could weigh on riskier assets like the Euro (EUR).
The Fed is widely expected to reduce borrowing costs by 25 basis points (bps) at its December meeting, lowering the overnight borrowing rate to a range of 4.25% to 4.50%, down from the current range of 4.50% to 4.75%. Market focus will likely shift to the Fed’s updated economic projections and the ‘dot plot,’ which may provide insights into the expected trajectory of interest rates through 2025 and 2026. If the Fed signals a more cautious approach to future rate cuts, it could provide support to the US dollar and apply downward pressure on the EUR.
ECB’s Dovish Stance Weighs on Euro
In contrast, the European Central Bank (ECB) has adopted a dovish tone. ECB President Christine Lagarde stated on Monday that further interest rate cuts are likely, with the direction of travel “clear” as inflation stabilizes. ECB Governing Council member Olli Rehn echoed these comments, indicating that rates will continue to decrease as inflation moves closer to the 2% target. Meanwhile, Isabel Schnabel, one of the ECB’s most influential hawks, suggested that the market is pricing in gradual rate reductions in the Eurozone, reflecting a less urgent need to address inflation concerns amid a sluggish economy.
Despite the expectation of further cuts, the pace and magnitude of these moves will depend on incoming economic data, which may limit the Euro’s upside potential in the near term.
Outlook for EUR/USD
With both central banks signaling further monetary easing, the EUR/USD pair is likely to experience limited volatility in the short term. Traders will be watching closely for any clues from the Fed’s economic projections, particularly regarding the future pace of rate cuts, as well as any shifts in the ECB’s stance on monetary policy. For now, the Euro remains supported by the expectation of a more gradual easing cycle in the Eurozone, but the looming Fed decision could limit significant upside for the pair in the near future.
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