EUR/USD trades largely directionless on Tuesday, moving between small gains and losses ahead of the Fed’s announcementThe FOMC is set to unveil its September policy decision on Wednesday. No interest rate changes are expected, but the bank will release the eagerly-awaited “Summary of Economic Projections”This article analyzes possible scenarios for the euro in the near term

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EUR/USD saw little volatility on Tuesday, moving around the flatline and oscillating between small gains and losses, with market participants refraining from making large directional bets ahead of a major risk event: the FOMC announcement.

The Federal Reserve is set to unveil its September decision on Wednesday, following a two-day meeting. While no changes to monetary policy are anticipated, officials will release the eagerly awaited ‘Summary of Economic Projections,’ which incorporates the influential dot-plot.

Forex traders holding positions in EUR/USD or any other currency pairs involving the U.S. dollar should closely monitor two critical aspects: the ultimate destination for the Federal funds rate and the easing measures being contemplated for 2024.

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In its June projection material, the U.S. central bank conveyed that borrowing costs would reach 5.625% by year-end (median estimate), a level that would imply one additional quarter-point hike from the current stance.

The prevailing sentiment among investors is that the tightening campaign has ended. Therefore, any signals reinforcing a renewed commitment to further tightening could trigger a hawkish repricing of interest rate expectations, sending U.S. Treasury yields higher and EUR/USD lower.


Source: CME Group – FedWatch Tool

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In the previous SEP, the Federal Reserve projected its benchmark rate would end 2024 at 4.625%, indicating 100 basis points of easing relative to the closing level in 2023. However, in light of the U.S. economy’s remarkable resilience and persistently high inflation, policymakers might lean towards embracing a ‘higher-for-longer’ strategy, meaning fewer rate cuts over the coming year.

In the event that the Fed shifts its forecast from four 25 basis points rate reductions to three cuts of the same magnitude, U.S. yields could shoot upwards, boosting the U.S. dollar across the board. This could weigh on EUR/USD in the near term.

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EUR/USD experienced a large pullback last week but ultimately found support near the 38.2% Fibonacci retracement of the September 2022/July 2023 leg higher, located around the 1.0610 threshold. Although this area could serve as a strong line of defense against further losses in the near term, a breakdown may fuel significant downside pressure, setting the stage for a move toward the psychological 1.0500 mark.

In the event of a bullish reversal, initial resistance stretches from 1.0760 to 1.0785. Upside clearance of this barrier could rekindle buying interest, paving the way for a rally toward the 200-day simple moving average at 1.0840. On further strength, the focus turns to 1.1025.


EUR/USD Chart Prepared Using TradingView

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