- Central bank moves this week will impact EUR/USD, with the ECB likely cutting rates and the Fed holding steady.
- Traders await ECB and Fed actions, with inflation trends and political factors influencing sentiment.
- EUR/USD tests key resistance, and a breakout may depend on a softer Fed stance.
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The FX market is bracing for a key week as EUR/USD steadily climbs ahead of significant central bank decisions. Yesterday's release of DeepSeek, a new AI tool from a Chinese startup, shook up the stock markets—particularly with Nvidia (NASDAQ:NVDA) down 16%+.
Yet, the forex market moved calmly, awaiting cues from the European Central Bank (ECB) and the Fed. As traders prepare, market consensus points to a likely rate cut from the ECB, while the Fed is expected to keep rates unchanged.
Though the Fed operates independently of government influence, former President Trump’s recent calls for rate cuts at the Davos conference cannot be ignored. Meanwhile, EUR/USD has been on a gradual upward trend, and the momentum could continue at least until Wednesday’s key decision.
What’s Next for the Fed?
Will the Fed pause its rate cuts in June? It's almost certain we’ll see a break in the current cycle this Wednesday, driven by uncertainties around the new administration’s policies - particularly trade tariffs.
The recent rebound in consumer and producer inflation also raises questions for US monetary policymakers. Combined with Trump’s influence, these factors suggest that the statement accompanying this week’s decision may offer new insights.
At the moment, markets are pricing in a rate cut for June with a probability just above 45%. That doesn’t indicate strong conviction yet, but the outlook could shift if trade policies remain stable and inflation trends back toward the 2% target.
If not, the rate-cut cycle may drag on, potentially triggering another wave of US dollar strength.
ECB on Course for Rate Cuts
The ECB, in contrast, has fewer reasons to hold back on a rate cut this week. Economic data shows inflation slightly above the target, while economic growth remains sluggish, not exceeding 1% year-on-year.
With that in mind, the ECB is widely expected to implement a 25 basis point cut. The accompanying narrative will likely emphasize that future decisions hinge on incoming data, though it’s unlikely this will be the last cut of the year.
EUR/USD at a Critical Juncture
EUR/USD is currently in an upward correction, pushing toward key resistance near 1.05. This level is proving tough for buyers to break through, but it doesn’t signal the end of the rally just yet.
A drop below the local support at 1.0350 would confirm the correction’s end, but if buyers can hold the trendline and push past 1.05, the next target would be strong resistance at 1.06.
The likelihood of a breakout increases if the Fed softens its stance in the upcoming statement, signaling a less aggressive approach to future rate moves.
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