Euro Under Pressure as Dollar Gains Ahead of Fed Decision

Key Moments

Fed Policy Outlook Lifts the Dollar

EUR/USD is edging lower around 1.1580 during the European session on Tuesday, pressured by a firmer US Dollar as markets position for the Federal Reserve’s monetary policy decision scheduled for Wednesday.

The US Dollar Index (DXY) – which tracks the Greenback against a basket of six major peers – is trading 0.1% higher, hovering near 99.75 at the time of writing.

Traders are focused on the Fed’s decision, which carries added significance as it will be the first policy meeting chaired by Kevin Warsh. The new Fed chief is anticipated to maintain a neutral stance on the outlook for monetary policy at a time when inflation pressures have picked up, reflecting the impact of elevated energy prices.

Market pricing, as reflected by the CME FedWatch tool, points to the Federal Reserve holding its target range for the federal funds rate at 3.50%-3.75%, marking the fourth straight meeting without a rate change.

ECB Expectations Support the Euro but Risks Persist

While the Euro is weaker against the US Dollar, it is performing better against other risk-linked currencies, supported by expectations that the European Central Bank may need to tighten policy further.

ECB Governing Council member Martins Kazaks stated on Monday that the central bank “needs to act again, if needed,” and flagged that upside inflation risks are likely to persist. His comments reinforce market speculation that the ECB could remain inclined toward further tightening if price pressures fail to ease sufficiently.

EUR/USD Technical Setup

From a technical standpoint, EUR/USD is trading slightly below the 20-period Exponential Moving Average (EMA), which is positioned at 1.1599, keeping the pair in a mildly bearish configuration. The pair also remains capped by a descending resistance trend line drawn from 1.1849.

On the downside, the pair is still trading above a prior ascending support trend line anchored at 1.1409. However, the Relative Strength Index (RSI) is hovering near 44, below the 50 midpoint, suggesting that any recovery attempts remain tentative while sellers continue to dominate.

Immediate resistance is seen around the 20-period EMA near 1.1600. Additional resistance levels are located at the former downtrend break zone around 1.1687 and at 1.1849, which marks the origin of the current descending trend line.

On the downside, initial support is aligned with the former uptrend break area near 1.1506. A deeper support region is found around 1.1409, where the earlier rising trend line began. A clear move below this level would reinforce the broader bearish structure for EUR/USD.

Key Technical Levels for EUR/USD

Understanding the Fed Interest Rate Decision

The Federal Reserve sets US monetary policy and determines the federal funds rate at eight pre-scheduled meetings per year. The central bank operates under a dual mandate: maintaining inflation at 2% and supporting full employment.

The primary policy lever for achieving these objectives is the level of interest rates, both the rate at which the Fed lends to banks and the rate at which banks lend to one another. When the Fed raises rates, the US Dollar typically strengthens as higher yields attract foreign capital. Conversely, lowering rates tends to weaken the Dollar as capital seeks higher returns elsewhere.

When the Fed leaves rates unchanged, market participants shift their attention to the tone of the Federal Open Market Committee (FOMC) statement to gauge whether it leans hawkish, implying expectations of higher future rates, or dovish, signaling an inclination toward lower future rates.

Fed Decision – Event Details