Summary
The easy gains from increased fiscal spending in Europe and the potential end to the war in Ukraine have likely already been made for EUR/USD and GBP/USD, meaning it may now come down to other factors to determine whether their bullish runs can extend. The first hurdle will come from Wednesday’s U.S. Federal Reserve interest rate decision, with the fate of the euro and pound likely resting on whether policymakers deviate from the view offered three months ago that two 25bp cuts in 2025 are likely.
Rate Cut Pricing Unwound Before Fed
There’s been a sizeable hawkish shift in Fed rate cut pricing in futures markets recently, with traders scaling back expectations for 2025 from over three in early March to just a little over two now. This has helped to narrow U.S. two-year yield spreads with Germany and Britain, coinciding with increasingly rocky price action in EUR/USD and GBP/USD over the same period.
Source: TradingView
FOMC Preview
I suspect the FOMC won’t be keen to rock the boat on rates guidance given the uncertain environment, pointing to the likelihood that the median FOMC forecast will remain at two cuts this year. While there’s a meaningful risk that the Fed’s inflation forecasts will increase relative to those three months ago due to looming import tariffs, this may be overshadowed by a large downward revision to the 2025 GDP growth forecast and potential increase in unemployment.
Source: Federal Reserve
Given the Fed’s dual mandate of maximum full employment and price stability, if it were to deviate from the rates guidance provided three months ago, it may lean towards a more dovish outcome than markets expect, rather than a more hawkish one. Given the shift in market pricing, such an outcome would wrongfoot many traders, adding to the potential for a kneejerk downside move in the dollar.
The Fed has shown in the past that it is keen to protect labour market gains, easing aggressively on signs of weakness like we saw in the middle of last year. If you think back to the detail in the latest jobs report for February, it wasn’t particularly strong. Heightened uncertainty could exacerbate downside risks further.
Whichever way FOMC members signal, it will likely have a large bearing on the performance of the U.S. dollar, especially against the euro and pound.
EUR/USD, GBP/USD Sensitive to Rates
Source: TradingView
Over the past month, both currencies have been sensitive to rate differentials between the United States and Europe. The correlation coefficients between EUR/USD with two-, five-, and 10-year bond yield spreads between the U.S. and Germany sit between -0.87 and -0.97. The inverse relationship is only slightly weaker for GBP/USD, with correlations to the same yield spreads between the U.S. and the U.K. ranging from -0.69 to -0.80.
Put simply, rate differentials matter for EUR/USD and GBP/USD—both before and after the Fed.
EUR/USD Eyes Next Bullish Break
Source: TradingView
EUR/USD finds itself trapped between uptrend support and horizontal resistance at 1.0950. The ascending triangle pattern that’s formed points to the risk of a looming topside break, putting minor resistance at 1.1002 and 1.1045 on the radar if it were to eventuate. Beyond 1.1045, there’s little visible resistance until above 1.1200.
On the downside, a break of the early March uptrend may see an unwind to 1.0830 or the 200-day moving average.
While the price action points to upside risks, the bearish divergence with RSI (14) from overbought levels does provide caution, although the signal is not yet confirmed by MACD which is continuing to trend higher.
GBP/USD Bullish Run Lacks Momentum
Source: TradingView
Perhaps unsurprisingly, GBP/USD finds itself in a similar position to EUR/USD, sitting in an uptrend following the bullish break above the 200-day moving average and resistance at 1.2870 at the start of March.
1.3045 looms as the first major hurdle for bulls, with a break above that bringing minor resistance at 1.3158, 1.3245, and 1.3313 into play. Should uptrend support give way, 1.2870 may provide a stern test for bears given the amount of work the pair has done around this level in the recent past.
The momentum picture is not as convincing as the price action, with bearish divergence seen with RSI (14). MACD is also looking toppy, although it’s yet to confirm the signal.