The EUR/USD pair is currently holding above the 1.1000 mark as traders eagerly await the ECB policy decision. Despite reduced expectations for a more aggressive Fed easing, the USD remains strong and is capping gains for the major. Traders are showing hesitancy ahead of the key central bank event risk as well as the release of the US PPI.
During the Asian session on Thursday, the EUR/USD pair struggled to gain traction and remained in a narrow band just above the 1.1000 psychological mark. This comes after hitting a four-week low the previous day. The markets are in a holding pattern as they wait for the highly-anticipated European Central Bank (ECB) policy meeting.
The ECB is widely expected to lower interest rates by 25 basis points amidst signs of cooling inflation in the Eurozone. The recent data showing a fall in the German Consumer Price Index supports the bets for a rate cut. This has dampened the strength of the Euro and acts as a headwind for the EUR/USD pair.
The US CPI report revealed that consumer prices in the US are easing overall. While core CPI suggests underlying inflation remains stable, hopes for a larger rate cut by the Fed have been dashed. This has led to an uptick in the US Treasury bond yields and strengthened the USD Index (DXY). The markets have already priced in a 25 bps rate cut at the next FOMC meeting.
With expectations for the Fed’s policy easing cycle already factored in, the safe-haven status of the USD is temporarily capped. This provides some support for the EUR/USD pair in the short term. Investors are likely waiting for the ECB’s updated economic projections and comments from Christine Lagarde before making significant moves.
The main refinancing operations rate set by the ECB has a direct impact on the Euro. If the ECB expects inflation to rise, they will increase interest rates, which tends to be bullish for the Euro. Conversely, if inflation is falling, the ECB may cut rates, weakening the Euro. These decisions influence foreign capital inflows and investment attractiveness in the Eurozone.
The EUR/USD pair is currently in a holding pattern as traders anticipate the ECB policy decision and the US PPI release. The market sentiment is cautious due to changing economic data and central bank policies. Investors are advised to watch for potential trading opportunities based on the outcomes of these key events.