Euro Slips as Traders Brace for Fed and ECB Policy Calls

Key Moments

EUR/USD trades around 1.1490 in early European dealings on Tuesday, slipping below the 1.1500 level.
The Federal Reserve is expected to keep its policy rate in the 3.50% to 3.75% range at the conclusion of its two-day meeting on Wednesday.
Interest rate futures fully factor in at least one ECB hike by end-July, while economists surveyed between March 9-13 still project unchanged rates.

Dollar Firms as EUR/USD Retreats

EUR/USD weakens toward 1.1490 in early European trading on Tuesday, extending its move below the 1.1500 threshold. The U.S. Dollar is gaining ground against the Euro as rising oil prices linked to the US and Israel’s war on Iran have heightened inflation concerns, sparking a significant reassessment of the Federal Reserve’s interest rate path. Markets are now focused on upcoming policy decisions from both the Fed and the European Central Bank later this week.

Fed Expected to Hold Rates Steady

The Federal Reserve is widely expected to leave its benchmark rate unchanged in a target band of 3.50% to 3.75% when it wraps up its two-day meeting on Wednesday. The climb in oil prices since the start of the Iran war has prompted analysts to delay expectations for the first Fed rate cut.

Goldman Sachs economists have scaled back projections for a June rate reduction, citing “a higher inflation path.” Their outlook now anticipates policy easing in September and December, instead of the previously expected June and September timetable.

Policy Body	Current Rate / Range	Market / Analyst Expectations
Federal Reserve	3.50% – 3.75%	Hold rates steady at the March meeting; cuts shifted to September and December by some analysts
European Central Bank	2.0% deposit rate	Hold at 2.0% in March; futures fully price one hike by end-July and about 55% odds of a second by end-December

ECB Outlook and Market Pricing

On the Euro side, the ECB is expected to keep its key deposit rate unchanged at 2.0% at its March meeting on Thursday. However, signaling from within the Governing Council remains mixed. ECB Governing Council member Peter Kazimir indicated that policymakers might move to raise rates earlier than markets had anticipated.

Interest rate futures are currently discounting a full rate increase by the end of July, along with roughly a 55% chance of an additional move by the end of December. In contrast, economists polled by Reuters between March 9-13 have maintained their view that rates will remain on hold.

Background: Euro and ECB Dynamics

The Euro serves as the common currency for 20 European Union member states within the Eurozone and is the world’s second most actively traded currency after the U.S. Dollar. In 2022, it represented 31% of all foreign exchange transactions, with an average daily turnover exceeding $2.2 trillion. The EUR/USD pair is the most heavily traded globally, accounting for an estimated 30% of all FX trades, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The European Central Bank, headquartered in Frankfurt, Germany, functions as the reserve bank for the Euro area, setting interest rates and overseeing monetary policy. Its primary mandate is price stability, which involves controlling inflation or fostering growth when needed. The central bank’s main policy lever is the adjustment of interest rates: relatively higher rates – or expectations of such – generally support the Euro, while lower or declining rates tend to weigh on the currency.

Monetary policy decisions are taken by the ECB Governing Council at meetings held eight times per year. The council includes the heads of the national central banks of the Eurozone countries and six permanent members, among them the ECB President, Christine Lagarde.

Economic Data and Trade Factors for the Euro

Eurozone inflation, measured by the Harmonized Index of Consumer Prices (HICP), is a key gauge for the ECB. When inflation runs higher than anticipated and above the 2% target, it typically pressures the central bank to tighten policy through rate hikes. Higher relative interest rates tend to bolster the Euro by making Eurozone assets more attractive to global investors.

Broader economic indicators – including GDP, Manufacturing and Services PMIs, labor market data, and consumer confidence – also influence the currency. Strong readings generally favor the Euro by signaling robust growth and potentially prompting more restrictive policy. Conversely, weak figures can undermine the currency. Data from the four largest Euro area economies – Germany, France, Italy and Spain – carry particular weight, as these countries together comprise 75% of the region’s output.

The trade balance is another important driver. This metric tracks the difference between export earnings and import spending over a given period. A positive trade balance tends to strengthen a currency because it reflects higher demand from foreign buyers needing that currency to pay for goods. A negative balance typically has the opposite effect.