EUR/USD: Higher as as Investors Await Fed Rate Hike Pause, ECB’s Rate Increase

Highlights

• EUR/USD gains as investors anticipate a pause in Fed rate hikes.
• ECB expected to implement a rate increase, adding to EUR/USD strength.
• Investors closely watch Fed’s pause and ECB’s upcoming rate decision.

Overview

The Euro is nudging higher against the U.S. Dollar on Wednesday, as investors anticipate a temporary halt in interest rate hikes by the U.S. Federal Reserve. After a consistent series of rate increases over ten consecutive meetings, the Federal Reserve is poised to take a breather and allow the U.S. economy to recalibrate.

At 11:30 GMT, the EUR/USD is trading 1.0804, up 0.0015 or +0.14%.

Traders Expect Fed to ‘Skip’ Rate Hike

Market expectations suggest a high likelihood that central bank policymakers will opt to “skip” this month’s meeting, rather than using the term “pause,” as they assess the impact of the cumulative 5 percentage points of hikes implemented since March 2022. It’s important to note that this doesn’t signify an end to the tightening cycle. Rather, officials may view this period of moderating inflation as an opportune moment for evaluation.

Fed to Hold Rates Within 5% – 5.25% Range

Traders have essentially factored in the likelihood of the Federal Reserve maintaining rates within the 5.00%-5.25% range later today. According to the CME FedWatch tool, there is a 63% probability of a rate hike occurring in July. The recent release of U.S. inflation data for May further solidified expectations for a pause in tightening, as price pressures displayed signs of moderation.

Euro Traders Eyeing Powell’s Remarks

The U.S. central bank has scheduled the release of its policy statement at 2 p.m. EDT (1800 GMT), followed by Fed Chair Jerome Powell’s press conference thirty minutes later. Market attention keenly focuses on these events. Although there is an anticipation that the Fed will pause, there remains an expectation that they will keep the door open for a potential hike in July.

Traders Expect 25 Basis Point ECB Rate Hike

Looking ahead, the European Central Bank (ECB) is set to hold its policy meeting on Thursday. It is widely expected that the ECB will implement an additional 25 basis point rate hike to combat persistent inflationary pressures.

Fed Policy, Powell’s Comments Set the Tone

In conclusion, as a result, investors anticipate a temporary halt in interest rate hikes by the U.S. Federal Reserve, which consequently causes the Euro to gain ground against the Dollar. Market attention focuses on the Federal Reserve’s policy statement and Jerome Powell’s press conference, as they determine the future course of action. Additionally, the upcoming policy meeting of the European Central Bank on Thursday is on the radar, with expectations of a rate hike to address lingering inflation concerns.

Technical Analysis

The EUR/USD is edging higher on Wednesday.  The early price action suggests traders are still respecting the 1.0807 (PIVOT).

With the  trend down, sellers are likely to come in on the first test of 1.0807 (PIVOT). However, overtaking it will indicate strong counter-trend buying. This could trigger an acceleration to the upside with 1.0979 (R1) the next target.

The inability to overcome 1.0807 (PIVOT) will signal the presence of strong sellers. This could trigger a resumption of the downmove with 1.0522 (S1) the next support target.