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EUR/USD Holds Ground Ahead of Fed Rate Decision, ECB Outlook Adds Caution

Elena by Elena
18/12/2024
in ECB
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The EUR/USD pair is holding onto positive territory, trading near 1.0505 during the early European session on Wednesday. However, market sentiment remains cautious ahead of the Federal Reserve’s (Fed) interest rate decision, which could weigh on riskier assets like the Euro (EUR).

The Fed is widely expected to reduce borrowing costs by 25 basis points (bps) at its December meeting, lowering the overnight borrowing rate to a range of 4.25% to 4.50%, down from the current range of 4.50% to 4.75%. Market focus will likely shift to the Fed’s updated economic projections and the ‘dot plot,’ which may provide insights into the expected trajectory of interest rates through 2025 and 2026. If the Fed signals a more cautious approach to future rate cuts, it could provide support to the US dollar and apply downward pressure on the EUR.

ECB’s Dovish Stance Weighs on Euro

In contrast, the European Central Bank (ECB) has adopted a dovish tone. ECB President Christine Lagarde stated on Monday that further interest rate cuts are likely, with the direction of travel “clear” as inflation stabilizes. ECB Governing Council member Olli Rehn echoed these comments, indicating that rates will continue to decrease as inflation moves closer to the 2% target. Meanwhile, Isabel Schnabel, one of the ECB’s most influential hawks, suggested that the market is pricing in gradual rate reductions in the Eurozone, reflecting a less urgent need to address inflation concerns amid a sluggish economy.

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Despite the expectation of further cuts, the pace and magnitude of these moves will depend on incoming economic data, which may limit the Euro’s upside potential in the near term.

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Outlook for EUR/USD

With both central banks signaling further monetary easing, the EUR/USD pair is likely to experience limited volatility in the short term. Traders will be watching closely for any clues from the Fed’s economic projections, particularly regarding the future pace of rate cuts, as well as any shifts in the ECB’s stance on monetary policy. For now, the Euro remains supported by the expectation of a more gradual easing cycle in the Eurozone, but the looming Fed decision could limit significant upside for the pair in the near future.

Related Topics:

  • How Big Is the ECB’s Balance Sheet?
  • What Is the Bond Portfolio Size of the ECB?
  • What is ECB Reference Rate?
Tags: dopernghsinflationinterest ratesiskitlmonetary policy
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Elena

Elena

Elena, a seasoned foreign exchange trader with a proven track record in the dynamic world of currency markets, brings a wealth of expertise and professionalism to the financial realm. With an extensive background spanning over a decade, she has honed her skills in analyzing global economic trends and implementing strategic trading solutions. Known for her meticulous attention to detail and analytical prowess, Elena has navigated through volatile market conditions with finesse, consistently delivering impressive results for her clients. Her comprehensive understanding of macroeconomic indicators, coupled with a keen awareness of geopolitical events, allows her to make informed decisions that optimize trading portfolios. Elena's commitment to staying ahead of the curve is evident in her continuous pursuit of knowledge and mastery of cutting-edge trading technologies. Her disciplined approach to risk management ensures prudent investment strategies, instilling confidence in both colleagues and clients alike.

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