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Euro holds near recent lows as Fed interest rate decision looms

  • EUR/USD trades flat as investors avoid fresh bets ahead of Wednesday’s Fed interest rate decision.
  • Markets price in around a 30% chance of a 25-basis-point rate hike.
  • Markets await US and Eurozone GDP and inflation data later this week.

EUR/USD struggles for direction on Tuesday as traders avoid taking directional positions ahead of the Federal Reserve’s (Fed) interest-rate decision on Wednesday while closely monitoring US-Iran developments. At the time of writing, the pair trades around 1.1370 after hitting an intraday low of 1.1353, its lowest level since June 26.

The Fed is widely expected to keep the fed funds rate unchanged at 3.50%-3.75%. However, traders see a small chance of a rate hike as elevated Oil prices keep inflation risks tilted to the upside. According to the CME FedWatch Tool, markets price in around a 30% probability of a 25-basis-point (bps) increase.

The US Dollar stays well-supported by prospects of higher US interest rates, while lingering geopolitical risks provide additional support. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 101.50, close to a one-month high.

US President Donald Trump said Tuesday that it was a “good time for Iran to make a deal,” warning that the US would “go back and finish the job” if no agreement was reached. Trump also threatened to strike Pickaxe Mountain and claimed that Iran did not control the Strait of Hormuz, saying, “We control the Strait.”

Earlier on Tuesday, Oman presented Iran with a proposal for the joint management of the Strait of Hormuz through “voluntary fees,” which would prevent Tehran from exercising sole control over the vital waterway.

On the data front, the four-week average of ADP Employment Change eased to 15K from 16.25K previously. Traders now await preliminary second-quarter Gross Domestic Product (GDP) data from the Eurozone and the United States on Thursday, alongside the US Personal Consumption Expenditures (PCE) inflation figures. Preliminary Eurozone inflation data for July is due on Friday.

Euro softens as ECB hawkishness meets fading rate expectations

Strategists at Scotiabank note that the Euro remains under pressure, with the EUR “soft, down a fractional 0.1% vs. the USD while drifting toward fresh one-month lows in the mid-1.13s and threatening a break to levels last seen in May 2025.” They add that “the broader tone remains dominant” for the US Dollar; however, “yield spreads are also suggesting a loss of fundamental support on the back of a renewed softening in ECB rate expectations since last Thursday’s policy decision.”

Scotiabank highlights that “messaging from the ECB remains hawkish as policymakers guide for a hike in September,” but the market “looks to be starting to fade some of the tightening that was priced in beyond the next meeting.” The bank also judges that “near-term fundamental risk is limited ahead of Friday’s preliminary CPI release.”

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Author

Vishal Chaturvedi

I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.

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