Euro trades cautiously against US Dollar ahead of expected Fed rate hike

The Euro (EUR) traded cautiously against the US Dollar (USD) on Wednesday as investors refrained from taking strong positions ahead of the Federal Reserve's (Fed) monetary policy announcement. The EUR/USD pair hovered around 1.1537, barely altered from the previous trading day and close to the one-month low of 1.1523. The Fed is scheduled to reveal its decision and Fed Chairman Kevin Warsh's remarks at 18:00 GMT and 18:30 GMT, respectively.

The US Dollar (USD) held strong near two-week highs, as traders almost completely priced in a 25-basis-point rate hike, potentially raising the federal funds target range to 3.75%-4.00%. The US Dollar Index (DXY), which gauges the Greenback's value against six key currencies, traded near 99.70. The anticipated rate hike stems from concerns that the energy crisis resulting from the Middle East conflict may keep inflation above the Fed's 2% target.

Recent Economic data have also pointed towards tighter policy, with the US Nonfarm Payrolls report indicating a stable labor market and Retail Sales rising 1.2% MoM in August, surpassing market expectations. However, the immediate interest rate decision might have limited impact on EUR/USD, as the majority of the anticipated rate increase has already been accounted for.

The Federal Open Market Committee's (FOMC) June dot plot projected a median year-end rate hike of 3.8%, suggesting an additional quarter-point increase by 2026. A hawkish Fed message signaling elevated inflation risks and more rate hikes could strengthen the US Dollar, potentially dragging EUR/USD down. Conversely, a surprise hold or a dovish hike could weaken the Dollar, assisting the Euro in rebounding.

Meanwhile, the European Central Bank (ECB) has raised interest rates twice this year to curb inflationary pressures fueled by oil prices. Although the central bank has not committed to a fixed rate path, it has stated that future decisions will depend on incoming data, which could lead to further rate hikes if inflation does not subside.

Analysts at BNY estimate the ECB's Governing Council may adopt a cautious approach after September, as opinions diverge on whether to postpone or accelerate policy tightening due to ongoing energy price increases. The table below illustrates the percentage change of the US Dollar (USD) against major currencies today, with the US Dollar emerging as the strongest against the British Pound.