29 Jan 2025

The EUR/USD pair may experience a decline due to heightened risk aversion in anticipation of the Federal Reserve's policy decision on Wednesday.

The CME FedWatch tool indicates almost certain probabilities of the Fed keeping its policy rate steady within the target range of 4.25%-4.50%.

Additionally, market participants anticipate that the European Central Bank will implement a 25 basis points reduction in rates during its policy meeting on Thursday.

EUR/USD has paused its two-day decline, trading at approximately 1.0440 during the Asian trading session on Wednesday. Nevertheless, the currency pair may continue to encounter difficulties due to prevailing risk-off sentiment as market participants await the Federal Reserve's interest rate decision, which is set to be announced later in the North American session.

The US Dollar (USD) is bolstered by the Federal Reserve's cautious approach to its policy outlook. The CME FedWatch tool suggests that there is nearly a 100% probability that the Fed will keep its policy rate within the target range of 4.25%-4.50%. However, traders are expected to pay close attention to Fed Chair Jerome Powell's press conference for any indications regarding the future trajectory of monetary policy.

The Greenback strengthened in response to tariff threats issued by US President Donald Trump. On Monday evening, Trump revealed intentions to impose tariffs on imports of computer chips, pharmaceuticals, steel, aluminum, and copper, aiming to encourage production within the United States and enhance domestic manufacturing capabilities.

Conversely, the Euro (EUR) may experience a decline as traders speculate that the European Central Bank (ECB) will reduce its Deposit Facility rate by 25 basis points (bps) to 2.75% during the upcoming Thursday meeting. This anticipation is driven by a lackluster economic forecast for the Eurozone and the belief that inflation will gradually align with the ECB’s target of 2%.

With a 25 bps rate reduction already factored into market expectations, investors will pay close attention to President Christine Lagarde’s press conference for indications on how Trump’s potential tariffs could affect economic and monetary policy.