EUR/USD Treads Water Ahead of the Fed as Market Awaits Key Cues

Summary:
• EUR/USD struggles below 1.0500 as traders await the Fed decision. Will the dollar push the pair lower? Read more...

The EUR/USD pair has struggled to find direction since last week, with price action remaining confined below the 1.0500 handle. A modest bounce off 1.0455 support has failed to inspire any meaningful upside as traders brace for the Federal Reserve decision tomorrow.

The pair’s decline over recent weeks has been driven by a resilient U.S. dollar and rising Treasury yields. The 10-year Treasury yield has increased to 4.35%, reinforcing the greenback’s strength and keeping EUR/USD under pressure.

All Eyes on the Fed Decision

The focus for EUR/USD trading this week will hinge on the post-Fed reaction tomorrow. Markets are pricing in no changes to the Fed funds rate, but the key question is how Powell and company will guide the outlook for 2024. Will they hint at a pause stretching into Q1, or will there be any discussion of rate cuts further down the line?

Looking at Fed funds futures, the odds of a pause in January stand at ~80%, while the chance of a March rate cut is now hovering around 55%. Traders will look closely at the Fed statement and Powell’s tone to determine if the central bank will validate market expectations or push back against them.

Eurozone Fundamentals Offer Little Support

On the euro front, sluggish economic fundamentals persist as a burden. The Eurozone economy continues to be stagnant, and inflation is decreasing further, providing the ECB with limited opportunity to shift towards a more hawkish stance. This maintains EUR/USD susceptible to additional decline, particularly since the gap in central bank policy supports the dollar.

EUR/USD Technical Outlook

• Immediate resistance: 1.0540 (20-day EMA); a break above targets 1.0605 (key resistance level).
• Support zone: 1.0455 remains the critical short-term support. A move below opens the door toward 1.0400.
• Further downside: Below 1.0400, sellers will look to test 1.0335 as the next target.
• Moving averages:
  • The pair remains below the 20-day EMA (1.0540) and the 50-day EMA (1.0658), signalling a bearish trend.

For now, EUR/USD remains on the back foot. Whether the Fed validates market expectations or reins in the dollar tomorrow will determine if the pair can find some relief or continue its descent.