EUR/USD moves slightly higher as US Dollar trades cautiously ahead of Fed policy decision
- EUR/USD edges up to near 1.1350 as the US Dollar faces pressure ahead of the Fed policy decision, in which it is expected to keep interest rates steady.
- US Treasury Bessent anticipated that new economic policies could boost economic growth to 3% next year.
- The German lower house is expected to vote for Conservative Merz as the new Chancellor.
EUR/USD ticks up to near 1.1350 in Tuesday’s European session. The major currency pair edges higher as the US Dollar (USD) trades cautiously, with investors focusing on the Federal Reserve’s (Fed) interest rate decision, which will be announced on Wednesday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, continues to face pressure near 100.00.
According to the CME FedWatch tool, traders have fully priced in that the Fed will keep interest rates steady in the range of 4.25%-4.50% in May. Therefore, the major trigger for the US Dollar will be monetary policy guidance by the Fed for the remainder of the year.
The Fed is expected to face a hard choice between holding interest rates long enough, until the central bank gets clarity on the economic outlook in the face of new economic policies announced by US President Donald Trump, and acting prematurely.
US President Trump’s tariff policies have triggered fears of an economic slowdown and elevated consumer inflation. However, US Treasury Secretary Scott Bessent stated on Monday that new economic policies will boost economic growth and lower the budget deficit. “We think we can get growth back to 3% by this time next year that will help bringing down the federal deficit by maybe 1% per year,” Bessent said in an interview with CNBC Television.
Other than Fed policy, investors will closely watch headlines pointing to the confirmation of bilateral trade deals between the US and its trading partners. US Treasury Secretary Bessent also expressed confidence that Washington “is very close to some deals on trade, maybe as early as this week on trade deals” and there could be “substantial progress on trade with China in the coming weeks”.
Daily digest market movers: EUR/USD ticks higher as Euro edges up
- The upside in the EUR/USD pair is also driven by some strength in the Euro (EUR). The major currency trades higher as Conservative leader Friedrich Merz is set to be sworn in as the next Chancellor of Germany on Tuesday. Conservatives won elections in February in coalition with Social Democrats, after prior Chancellor Olaf Scholz announced a snap election in late 2024. The constitution of the German government will speed up the execution of defense spending plans and investment measures announced at the Bundestag lower house of parliament in March.
- However, firm expectations that the European Central Bank (ECB) will reduce interest rates in the June meeting would limit the Euro’s upside. The ECB is widely anticipated to reduce its Deposit Facility rate by 25 basis points (bps) to 2%.
- Traders are increasingly confident that the ECB will reduce interest rates for the eighth time in a year and seventh time in a row amid high conviction that the Eurozone inflation is on track to return to the central bank’s target of 2% by the year-end. Additionally, fears of economic shocks due to the fallout of tariffs by US President Trump in an already slowing economy pave the way for further monetary policy easing.
- Meanwhile, several ECB officials have also signaled support for further monetary policy expansion and warned of downside risks to Eurozone inflation.
Technical Analysis: EUR/USD trades above 1.1300
EUR/USD oscillates inside Monday’s trading range above 1.1300 on Tuesday. The 20-day Exponential Moving Average (EMA) around 1.1260 continues to act as a major support for the pair.
The 14-day Relative Strength Index (RSI) falls inside the 40.00-60.00 range, indicating that the bullish momentum is concluded for now. However, the upside bias still prevails.
Looking up, the psychological level of 1.1500 will be the major resistance for the pair. Conversely, the September 25 high of 1.1214 will be a key support 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.