EUR/USD Forecast: Euro looks to break out of range on Fed policy decisions
- EUR/USD trades in a tight range at around 1.0500 on Wednesday.
- The Fed is set to lower the policy rate by 25 basis points.
- The revised Summary of Economic Projections (SEP) could trigger a big market reaction.
EUR/USD registered small losses on Tuesday but managed to stabilize near 1.0500 in the European morning on Wednesday. The Federal Reserve's (Fed) interest rate decision and revised Summary of Economic Projections (SEP) could cause the pair to break out of its trading range.
Euro PRICE Last 7 days
The table below shows the percentage change of Euro (EUR) against listed major currencies last 7 days. Euro was the weakest against the US Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.29% | 0.64% | 1.11% | 1.10% | 1.00% | 1.05% | 1.21% | |
| EUR | -0.29% | 0.35% | 0.82% | 0.80% | 0.70% | 0.75% | 0.91% | |
| GBP | -0.64% | -0.35% | 0.47% | 0.46% | 0.35% | 0.40% | 0.56% | |
| JPY | -1.11% | -0.82% | -0.47% | -0.00% | -0.10% | -0.06% | 0.11% | |
| CAD | -1.10% | -0.80% | -0.46% | 0.00% | -0.10% | -0.05% | 0.10% | |
| AUD | -1.00% | -0.70% | -0.35% | 0.10% | 0.10% | 0.05% | 0.21% | |
| NZD | -1.05% | -0.75% | -0.40% | 0.06% | 0.05% | -0.05% | 0.16% | |
| CHF | -1.21% | -0.91% | -0.56% | -0.11% | -0.10% | -0.21% | -0.16% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent EUR (base)/USD (quote).
The risk-averse market environment helped the US Dollar (USD) hold its ground on Tuesday and made it difficult for EUR/USD to gain traction.
Later in the day, the Fed is widely expected to lower the policy rate by 25 basis points (bps) to the range of 4.25%-4.5%. Since such a decision is already priced in, it is unlikely to trigger a noticeable market reaction. Instead, market participants will scrutinize the details of the revised Summary of Economic Projections (SEP), the so-called dot plot.
In case the dot plot points to a rate reduction of 100 bps or more in 2025, the USD is likely to come under pressure in the near term. On the other hand, the USD could gather strength and force EUR/USD to stay on the back foot if the revised SEP highlights less than 100 bps of rate cuts next year.
Fed Chairman Jerome Powell's comments on the policy outlook will also be watched closely in the post-meeting press conference starting at 19:30 GMT. If Powell adopts a cautious tone regarding further policy easing, citing the uncertainty surrounding the inflation outlook on President-elect Donald Trump's proposed tariff policies, the USD is likely to stay resilient against its rivals heading into the holidays.
EUR/USD Technical Analysis
EUR/USD faces stiff resistance at 1.0520, where the 100-period Simple Moving Average (SMA) on the 4-hour chart, the 50-period SMA and the Fibonacci 23.6% retracement of the latest downtrend meet. Once the pair rises above this level and starts using it as support, it could target 1.0575 (200-period SMA) and 1.0600 (Fibonacci 38.2% retracement).
Looking south, first support could be spotted at 1.0440 (static level), 1.0400 (end-point of the latest downtrend) and 1.0330 (November 22 low).
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.
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Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
