EUR/USD retains its gains before the Fed’s monetary policy decision

• The EUR/USD drops to around 1.1350 as the US dollar experiences a slight increase ahead of the Fed’s decision on monetary policy.
• Market participants will be closely watching the Fed’s guidance regarding the outlook for monetary policy.
• Conservative politician Friedrich Merz has been appointed German Prime Minister after a second attempt.

The EUR/USD is set to decline to about 1.1350 during European trading on Wednesday. There’s a slight pressure on major currency pairs, with the USD edging up just before the Fed’s interest rate decision expected at 18:00 GMT. The US Dollar Index (DXY), which measures the dollar against six major currencies, inches up to around 99.55.

According to the CME FedWatch tool, traders are anticipating that the Fed will keep interest rates stable in the current range of 4.25%-4.50%. Investors will focus on the monetary policy statement and the press conference led by Chairman Jerome Powell for insights on how long the central bank might maintain its restrictive stance.

Fed officials have indicated that changes in monetary policy won’t be made until there are clear signs of weakness in both the labor market and economic growth. This follows the adjustment in consumer inflation expectations attributed to new economic policies.

April’s Non-Farm Payroll (NFP) data indicated steady employment growth, which presents a limiting factor for any reduction in interest rates. Meanwhile, the US economy saw a rise of 0.3% in the first quarter, largely due to a surge in imports made by US companies in anticipation of higher tariffs.

In contrast, President Trump has repeatedly urged the central bank, especially Jerome Powell, to lower interest rates. Trump has even suggested that he may remove Powell from his position if he doesn’t reduce borrowing costs, despite a decline in energy prices and food costs.

Apart from the Fed’s policies, US-China trade negotiations happening in Geneva are also significantly influencing the dollar. US Treasury Secretary Scott Bescent and trade representative Jamieson Greer confirmed they will meet with their Chinese counterparts for discussions on trade late Tuesday. This is viewed as a positive step towards resolving tensions in the US-China trade relationship, which is buoying S&P 500 futures.

Market Update: EUR/USD Remains Strong Yet Under Pressure

• The EUR/USD is performing well with the euro holding steady after Friedrich Merz’s swearing-in as German Prime Minister in his second attempt. Merz had previously fallen short of an absolute majority despite his party coalition securing 326 votes.
• Merz’s ascension is expected to alleviate concerns over political instability and bolster defense spending measures passed in March, which could, in turn, strengthen the German economy and support the euro.
• However, the euro’s gains may be capped as the European Central Bank (ECB) is likely to continue its accommodative policies at its upcoming June meeting. Analysts predict a further cut in interest rates next month as the ECB concentrates on mitigating economic shocks arising from tariffs rather than focusing on inflation within the eurozone.
• On a broader scale, the European Commission is actively assessing steps to counteract the effects of increased US tariffs. EU Trade Commissioner Maros Sefcovic mentioned that the EU is looking into measures while delaying retaliatory tariffs for 90 days. Nonetheless, Sefcovic emphasizes that resolving trade issues with the US remains the EU’s top priority. Reports suggest the EU plans to impose tariffs on US goods worth around 100 billion euros if trade negotiations don’t yield satisfactory outcomes.
• In economic terms, EU retail sales data for March fell short of expectations. An important gauge of consumer spending, retail sales dipped by 0.1% month-over-month, with analysts anticipating a flat performance. In February, consumer spending rose by 0.2%, adjusted from a prior 0.3% estimate, while year-over-year retail sales increased by 1.5%, lagging behind the expected 1.6%.

Technical Analysis: EUR/USD Surpasses 20-day EMA

The EUR/USD, near Tuesday’s peak around 1.1370, is in a bullish position as it maintains its 20-day exponential moving average (EMA) at approximately 1.1270.

The 14-day relative strength index (RSI) currently sits within the 40.00-60.00 range, suggesting that bullish momentum has plateaued, although upward tendencies persist.

Looking ahead, a psychological barrier around 1.1500 could serve as significant resistance for the pair, while the September 25th high of 1.1214 stands out as crucial support for the euro bulls.

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