Market Data 
- EUR/USD wobbles near 1.0420 as investors await the Fed’s policy outcome.
- The Fed is expected to keep interest rates steady with a slightly hawkish outlook.
- Trump’s tariffs plans and dovish ECB bets are expected to keep the Euro on the back foot.
EUR/USD trades with caution near 1.0420 in Wednesday’s European session, with investors focusing on the Federal Reserve (Fed) monetary policy announcement at 19:00 GMT. The Fed is widely anticipated to keep interest rates steady in the range of 4.25%-4.50% as officials are worried that the disinflation trend toward the central bank’s target of 2% has stalled and the labor market has stabilized.
As markets have fully priced in that the Fed will keep rates unchanged, investors will pay close attention to Fed Chair Jerome Powell’s press conference after the policy decision. Investors would be keen to know for how long the Fed will keep interest rates at current levels, given the stubborn inflation outlook on the assumption that the imposition of hefty tariffs by United States (US) President Donald Trump will increase prices of goods and services.
Trump’s push for higher tariffs on its trading partners has escalated global growth concerns. President Trump has recommended tariffs on pharmaceuticals, steel and sophisticated chips to boost domestic production. Meanwhile, 25% tariffs on Canada and Mexico and 10% on China are very much on the cards, as White House Press Secretary Karoline Leavitt indicated on Tuesday. Leavitt said that 25% tariffs on Canada and Mexico from February 1 are “still on the books”. Leavitt added that the President is “very much still considering 10% tariffs on China” from Saturday.
Ahead of the Fed’s policy decision, the US Dollar (USD) trades subduedly, with the US Dollar Index (DXY) wobbling around 107.90. The US Dollar has performed strongly in the past few months on the assumption that Trump’s tariffs would accelerate price pressures and force the Fed to keep interest rates unchanged for longer.
Daily digest market movers: EUR/USD skates on thin ice as ECB looks set to cut rates on Thursday
- Another reason behind the cautious performance of the EUR/USD pair is the European Central Bank’s (ECB) monetary policy meeting, scheduled for Thursday. Traders have fully priced in a 25 basis points (bps) interest rate cut, pushing the Deposit Rate lower to 2.75%. Market participants are also confident that the ECB will continue reducing its key borrowing rates in all meetings by the summer. Such a scenario would be unfavorable for the Euro’s (EUR) short and long-term outlook.
- ECB dovish bets have accelerated amid fears that Trump’s tariffs will weaken the already faltered Eurozone economy. Germany, the powerhouse of the shared bloc, is forecasted to contract this year, the Federal of German Industries (BDI) said on Tuesday. The agency expects that the German economy will shrink for the third year in a row as the government has been unable to address structural weakness in the national economy. “The situation is very serious: Growth in industry in particular has suffered a structural break,” BDI President Peter Leibinger said.
- Investors will keenly focus on ECB President Christine Lagarde’s press conference on how the old continent will deal with Trump’s tariffs. Last week at the World Economic Forum (WEF) in Davos, Lagarde warned that Europe must “anticipate what will happen” and be “prepared in order to respond,” as Trump’s tariffs would be “selective” and “focused.”
- Analysts at ING said, “The tariff threat may be perceived more seriously given the Treasury’s active planning, and that materially shrinks the upside potential for the euro.” On Monday, US Treasury Secretary Scott Bessent proposed imposing a 2.5% tariff universally and also guided to raise them at a similar pace every month.
Technical Analysis: EUR/USD faces pressure near 50-day EMA
EUR/USD continues to struggle around the 50-day Exponential Moving Average (EMA), which trades around 1.0455, on Wednesday. The major currency pair corrects to near 1.0410 after failing to extend its upside move above the key resistance of 1.0530. The near-term outlook remains firm as the pair holds the 20-day EMA, which trades around 1.0395.
The 14-day Relative Strength Index (RSI) failed to climb above the 60.00 hurdle after recovering from below the 40.00 level, suggesting that the trend would be sideways.
Looking down, the downward-sloping trendline from the September 30, 2024, high of 1.1209 will act as major support for the pair near the round level of 1.0300, followed by the January 20 low of 1.0266. Conversely, the December 6 high of 1.0630 will be the key barrier for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro 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 then its currency will gain in value 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.
