EUR/USD inches higher to near 1.0450, upside seems limited amid a risk-off mood
- EUR/USD could lose ground amid increased risk aversion ahead of Fed policy decision on Wednesday.
- CME FedWatch tool suggests nearly 100% odds of the Fed maintaining its policy rate within the target range of 4.25%-4.50%.
- Traders expect the European Central Bank to deliver a 25 basis points rate cut at Thursday’s policy meeting.
EUR/USD halts its two-day losing streak, trading around 1.0440 during the Asian hours on Wednesday. However, the pair could continue facing challenges amid risk-off sentiment ahead of the Federal Reserve’s (Fed) interest rate decision scheduled later in the North American session.
The US Dollar (USD) receives support from the Federal Reserve’s (Fed) cautious stance regarding its policy outlook. According to the CME FedWatch tool, market expectations indicate nearly 100% certainty that the Fed will maintain its policy rate within the target range of 4.25%-4.50%. However, traders will be closely monitoring Fed Chair Jerome Powell’s press conference for any hints regarding the future direction of monetary policy.
Moreover, the Greenback gained ground following tariff threats made by US President Donald Trump. Trump announced plans on Monday evening to impose tariffs on imports of computer chips, pharmaceuticals, steel, aluminum, and copper. The goal is to shift production to the United States (US) and bolster domestic manufacturing.
The Euro (EUR) could weaken as traders anticipate the European Central Bank (ECB) will lower its Deposit Facility rate by 25 basis points (bps) to 2.75% on Thursday. This expectation stems from the sluggish economic outlook in the Eurozone and confidence that inflation will sustainably return to the ECB’s 2% target.
With a 25 bps rate cut already priced in, investors will closely monitor President Christine Lagarde’s press conference for insights on how potential tariffs from Trump might influence economic and monetary policy.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.