EURUSD slides to near 1.0400 in Wednesday’s North American session, with investors focusing on the Federal Reserve monetary policy announcement at 19:00 GMT. The Fed is widely anticipated to keep interest rates steady in the range of 4.25-4.50% as officials are worried that the disinflation trend toward the central bank’s target of 2% has stalled and the labour market has stabilised.
As markets have fully priced in that the Fed will keep rates unchanged, investors will pay close attention to Chair Jerome Powell’s press conference. They would be keen to know for how long the Fed will keep interest rates at current levels, given the stubborn inflation outlook on the assumption that the imposition of hefty tariffs by President Donald Trump will increase prices of goods and services.
Trump’s push for higher tariffs on its trading partners has escalated global growth concerns. He has recommended tariffs on pharmaceuticals, steel and sophisticated chips to boost domestic production.
Meanwhile, 25% tariffs on Canada and Mexico from February 1 and 10% on China are very much on the cards, as White House Press Secretary Karoline Leavitt indicated on Tuesday. Leavitt added that the president is “very much still considering 10% tariffs on China” from Saturday.
Ahead of the Fed’s policy decision, the US dollar trades subduedly, with the DXY Dollar Index wobbling around 107.90. The US dollar has performed strongly in the past few months on the assumption that Trump’s tariffs would accelerate price pressures and force the Fed to keep rates unchanged for longer.
Another reason behind the cautious performance of the EURUSD pair is the European Central Bank’s monetary policy meeting on Thursday. Traders have fully priced in a 25 basis points (bps) rate cut, pushing the Deposit Rate lower to 2.75%.
Market participants are also confident that the ECB will continue reducing its key borrowing rates in all meetings by the summer. Such a scenario would be unfavourable for the euro’s short and long-term outlook.
Germany, the powerhouse of the shared bloc, is forecasted to contract this year, the Federation of German Industries (BDI) said on Tuesday. The agency expects that the economy will shrink for the third year in a row as the government has been unable to address structural weaknesses.
“The situation is very serious: growth in industry in particular has suffered a structural break,” BDI President Peter Leibinger said.
Investors will focus on ECB President Christine Lagarde’s press conference on how the old continent will deal with Trump’s tariffs.
Last week at the World Economic Forum (WEF) in Davos, Lagarde warned that Europe must “anticipate what will happen” and be “prepared in order to respond,” as Trump’s tariffs would be “selective” and “focused.”
Analysts at ING said, “the tariff threat may be perceived more seriously given the Treasury’s active planning, and that materially shrinks the upside potential for the euro.”
On Monday, US Treasury Secretary Scott Bessent proposed imposing a 2.5% tariff universally and also guided to raise them at a similar pace every month.
EURUSD chart by TradingView
(Source: OANDA)
