EUR/USD steadies as Fed holds rates, ECB up next

The EUR/USD currency pair remained mostly flat on Thursday, after the Federal Reserve left borrowing costs on hold, in line with market consensus.

Still, the US central bank provided scant clues regarding further rate cuts this year.

The Fed kept its federal funds rate target range without change at 4.25%-4.50% at its January meeting, pausing its monetary easing cycle after three rate cuts in a row in 2024.

Fed policy makers said US economic activity had continued to expand solidly. The rate of unemployment has steadied at a low level in recent months, while labor market conditions remain sound.

Policy makers said they would wait for further inflation and employment data and clarity on the impact of the Trump administration’s policies.

Fed Chair Jerome Powell said during his press conference that it was too early to say what the result of Trump’s policies would be, while the Fed’s 2% inflation target would remain in place.

“It seems pretty understandable and comprehensible that they are feeling confident that they may not need any rate cuts,” Juan Perez, director of trading at Monex USA, was quoted as saying by Reuters.

“And they’re not making any promises. But at least in the questions that he’s being asked, Powell is being very cautious that until there is some more evidence they’re going to be on a wait-and-see mode. That is why you didn’t see the FX market collapse. But you’re seeing the dollar steady,” Perez noted.

ECB expected to deliver 25 bps cut

Meanwhile, the European Central Bank is largely expected to lower its main refinancing operations rate by 25 basis points to 2.90% at its January policy meeting. And, the ECB deposit facility rate is expected to be reduced to 2.75% from 3.00% currently.

Inflation in the Euro Area is expected to gradually ease, with forecasts of 2.1% in 2025 and 1.9% in 2026.

Core CPI inflation is also expected to ease, with a medium-term target of 2%.

Market players will be closely watching ECB President Christine Lagarde’s press conference for any hints regarding future interest rate trajectory.

Finally, in terms of macro data, preliminary GDP growth reports for Q4 from both the Euro Area and the US will also be on traders’ radar.

The EUR/USD currency pair was last inching up 0.01% on the day to trade at 1.0422.

The major Forex pair is likely to remain under pressure, as the interest rate differential between the US and the Euro Area increases.