EUR/USD continues to churn after cautious Fed disappoints markets

EUR/USD remained stuck to the 1.1300 region on Wednesday.
The Fed’s rate hold was broadly expected, but an overly-cautious Powell caught markets by surprise.
Investors are still holding out hope for a pivot toward rate cuts by July.

Joshua Gibson FXStreet

EUR/USD stuck to its middling ways on Wednesday, remaining entrenched near the 1.1300 handle after the Federal Reserve’s (Fed) latest rate call went about as well as traders expected, albeit with a fresh batch of “wait-and-see” warnings from Fed Chair Jerome Powell. The economic calendar on the European side remains strictly mid-tier this week, leaving Fiber traders to sit and chew on a Fed that is turning increasingly cautious.

Fed's Powell: Right thing to do is await further clarity

The Fed's recent rate announcement highlights that while US employment and economic activity remain strong, concerns regarding labor and output risks have increased, primarily due to uncertainty related to tariffs and US trade policies. This apprehension among Fed officials about economic risks has raised market expectations for imminent rate cuts, temporarily pushing EUR/USD to higher levels.

However, market sentiment diminished after Fed Chair Jerome Powell's press briefing. He emphasized that if US trade tariffs remain, they will hinder the Fed’s goals for inflation and employment for the rest of the year.

Chair Powell also warned that ongoing policy uncertainty is likely to lead the Fed to adopt a continued 'wait-and-see' stance on interest rates. Despite the significant negative impacts on consumer and business confidence caused by the Trump administration's tariff policies, the actual economic data has shown little adverse effect, complicating the Fed's rationale for any immediate interest rate adjustments.

According to the CME's FedWatch Tool, market participants are still anticipating a quarter-point rate cut in July. However, the probability of holding rates steady in July has increased to 30%, dampening widespread market expectations for a smooth transition into a new rate-cutting cycle.

EUR/USD price forecast

EUR/USD has found an interim bottom just above the 1.1200 handle, bolstering price action into the 1.1300 region. Fiber has eased from multi-month highs posted just north of 1.1500, but downside momentum remains limited as Euro traders await key market developments before pushing too hard in either direction.

EUR/USD daily chart

Euro FAQs

What is the Euro?

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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.

Author

Joshua Gibson

FXStreet

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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