Euro Holds Above 1.1600 as Markets Await Fed Decision

Key Moments

Euro Extends Recovery but Momentum Pauses Before Fed Decision

The EUR/USD pair is maintaining a constructive tone for the third straight session, trading firmly above the 1.1600 handle during the Asian session on Wednesday. The move builds on a recent rebound from the 1.1500 psychological area, which marked a more than two-month low last week. However, buying conviction is limited as market participants hold back from initiating larger positions ahead of the conclusion of the two-day FOMC policy meeting.

US-Iran Peace Framework Pressures Dollar, Supports Euro

The US Dollar remains on the back foot as optimism surrounding an interim peace arrangement between the US and Iran weighs on demand for the safe-haven currency. This softer USD backdrop is providing a tailwind for EUR/USD.

At the same time, the Euro is drawing additional strength from the European Central Bank’s recent hawkish turn. The ECB has raised interest rates for the first time in three years and increased its 2026 inflation projection to 3%, reflecting persistent energy shocks and more widespread price pressures across the euro area.

ECB Policy Expectations Remain Firm Despite Middle East De-escalation

Market pricing continues to reflect expectations for roughly 40 basis points of additional ECB tightening for 2026. This stance persists even as tensions in the Middle East have eased.

The article notes that the US and Iran have agreed on a framework peace deal aimed at ending the conflict that began earlier in 2026. The initial memorandum of understanding includes a 60-day ceasefire, the reopening of the Strait of Hormuz, and a platform for technical discussions on Iran’s nuclear program. Further details of the agreement are described as limited at this stage.

Fed Outlook and Kevin Warsh’s Debut in Focus

Despite the near-term pressure on the Dollar, expectations that the Federal Reserve may still deliver a 25 basis point rate increase in December are preventing more aggressive bearish positioning in the USD. This is helping to cap the upside potential for EUR/USD in the near term.

Attention is firmly centered on the upcoming Fed rate announcement, the new economic projections, and the updated dot plot. Market participants will also closely analyze comments from the new Fed Chair, Kevin Warsh, at the post-meeting press conference for any guidance on the future policy path.

Background on the Euro and Key Drivers

What is the Euro?

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day.
EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.