- Central banks pause with the Fed, BoC, and Riksbank walking back easing signals
- Policy rates remain restrictive, despite large-scale easing
- Markets still pricing 90bps of ECB cuts in 2025
- Any hint of ECB easing slowdown could trigger EUR/USD short squeeze
Summary
With monetary policy in many developed economies now at or near neutral levels and economic uncertainty elevated, central banks are shifting course. The era of guiding towards future rate cuts is over, at least for now. The Federal Reserve, Bank of Canada, and Sweden’s Riksbank have all refused to commit to further easing in their latest policy decisions.
Markets are pricing in 90bps of rate cuts from the European Central Bank (ECB) this year, adding to the 100bps already delivered. Any sign of wavering commitment from ECB policymakers could spark significant volatility in the euro.
With a coordinated shift among central banks seemingly underway, we examine the technical picture for EUR/USD ahead of Thursday’s ECB decision.
Policy Easing Hits Pause
After an initial flurry of rate cuts in 2024, central banks are now noticeably non-committal towards further easing. We saw it from the Fed, Bank of Canada and Riksbank on Wednesday.
Fed Reaches 'Do Nothing' Mode
Fed Chair Jerome Powell suggested policy was “well calibrated” to achieve the FOMC’s dual mandate of maximum employment and price stability. When asked about a potential March rate cut, he responded, “the broad sense of the committee is that we don’t need to be in a hurry to adjust our policy stance.”
Well calibrated. No hurry. To the layperson, that sounds like “do nothing.” That’s likely because the data isn’t making a compelling case to change course, as the Fed noted in its January policy statement:
“Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilised at a low level in recent months, and labour market conditions remain solid. Inflation remains somewhat elevated.”
Six weeks ago, the message was far more dovish:
“Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.”
No progress on inflation. No further easing in labor market conditions. Powell attempted to walk back the changes, suggesting they weren’t meant to send a particular signal—but they do.
It wasn’t just the Fed pressing pause Wednesday.
BoC Easing Bias Jettisoned
In October, the Bank of Canada said:
“If the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further. However, the timing and pace of further reductions will be guided by incoming information.”
By December, that softened to:
“We will be evaluating the need for further reductions one decision at a time.”
Fast forward to Wednesday, and any easing bias was gone.
“The cumulative reduction in the policy rate since last June is substantial. Lower interest rates are boosting household spending. The economy is expected to strengthen gradually and inflation to stay close to target.”
Riksbank Retreats to Sidelines
Sweden’s Riksbank also removed its bias for further cuts, simply stating it will “carefully evaluate the need for future interest rate adjustments.” In December, it had suggested a rate cut was likely in the first half of 2025.
ECB Dovish Bias Under Scrutiny
The Fed, Bank of Canada, and Riksbank have already cut rates by 100bps or more—like the ECB. Yet, despite those cuts, policy settings arguably remain restrictive rather than expansionary.
For traders betting the ECB will push rates into expansionary territory below 2%, the risk is that pricing may be too aggressive, leaving short euro positions exposed if the ECB signals a slower pace of cuts or an eventual pause.
Source: Bloomberg
Before Thursday’s ECB rate decision, overnight index swaps price a 25bp deposit rate cut as a certainty. By year-end, a cumulative 89bp of easing is expected, implying at least two more cuts, with a third seen as a coin toss.
That aligns with guidance from many ECB policymakers, but if there’s been one trend among central banks recently, it’s been walking back prior signals for aggressive easing amid elevated uncertainty.
While short and long-term rate differentials haven’t been a dominant driver of EUR/USD in early 2025—overshadowed by volatility tied to shifting sentiment on US trade policy—they have played a major role in the past. At the margin, that suggests any signs of hesitation from the ECB on further easing could spark a euro short squeeze.
EUR/USD Provides Mixed Technical Picture
Source: TradingView
For the bulls, the pair remains in an uptrend established on January 13. The retest and bounce off this level on Wednesday validate it as support. RSI (14) and MACD are also trending higher, providing a bullish signal on momentum. Clouding the bullish picture, the three-candle evening star pattern earlier this week provides a warning the uptrend may yet come under renewed threat.
For those contemplating bullish setups, longs could be established above the uptrend with a stop beneath for protection. Ideally, you’d want to see a sustained push above the 50DMA before entry, especially as the price has been interacting with the level over the past two weeks. Resistance sits overhead at 1.0461, making it an initial hurdle for those seeking better risk-reward. Monday’s high around 1.0530 looms as a potential target, with 1.0544 and 1.0600 the next levels after that.
Alternatively, if EUR/USD breaches the uptrend and holds there, the setup could flip, allowing for shorts to be established beneath with a stop above for protection. 1.0345 and 1.0200 screen as potential targets.