Euro holds steady near 17-month lows as Fed rate decision approaches

A softer US Dollar lends modest support to EUR/USD ahead of the Fed’s interest rate decision.
Expectations for a December rate hike take centre stage as the Fed is likely to leave rates on hold.
The Euro remains exposed to France’s budget crisis ahead of Thursday’s ECB monetary policy announcement.

EUR/USD holds a modest upward bias in Wednesday’s American session, with the US Dollar (USD) taking a breather from its rally before the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT. The pair is trading near 1.1134 at the time of writing, having briefly slipped to 1.1113, its weakest level since May 2025.

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After touching a new two-week peak of 102.49 earlier in the session, the US Dollar Index (DXY) is hovering near 102.33. The index measures the Greenback against a basket of six major currencies.

Following September’s 25-basis-point (bps) increase, the Fed is widely expected to maintain interest rates at 3.75%-4.00%. With policymakers still committed to returning inflation to the central bank’s 2% target, traders will assess whether the announcement provides grounds to retain bets on another rate hike in December.

Persistent Middle East tensions continue to skew inflation risks upwards. Following two days of declines, oil prices are recovering after the Wall Street Journal reported that Washington had warned Gulf states about a potential military operation against Iran after the US midterm elections.

The CME FedWatch Tool currently puts the market-implied probability of a December rate hike at 85%. If the Fed indicates that additional tightening remains an option, the US Dollar could regain upward momentum, putting pressure on the Euro. A less hawkish tone, however, could lead traders to pare back these expectations and allow EUR/USD to recover.

According to ING analysts, EUR/USD "remains at the lows of the year as broad dollar strength and an unresolved French budget crisis dominate," while Societe Generale strategists observe that the Euro "really hasn’t been able to manage much of a bounce, regardless of shorts," adding that "energy prices, fiscal concerns and social unrest have all weighed" on the single currency.

The strategists maintain that "if the FOMC message (whatever that looks like in the brave new world) keeps December hike expectations alive, our bias is to remain dollar-positive, and unless the ECB is very hawkish, European economic fundamentals will weigh," suggesting continued vulnerability for the Euro if US policy expectations remain favourable to the Dollar.

Having increased rates by a cumulative 50 bps this year, the European Central Bank (ECB) is widely expected to retain its 2.50% deposit rate when it delivers its monetary policy decision on Thursday. Market participants will scrutinise the announcement for indications of a possible December increase, alongside policymakers’ assessment of persistent energy-led inflation against the risks to economic growth.

Questions About the Fed

How does the Federal Reserve’s role influence the US Dollar?

The Federal Reserve (Fed) sets US monetary policy with two objectives: maintaining price stability and promoting full employment. Adjustments to interest rates are its main means of meeting these mandates. If prices climb too rapidly and inflation exceeds the Fed’s 2% target, the central bank increases interest rates, raising borrowing costs across the economy. Higher rates make the US more attractive to international investors seeking a place for their funds, strengthening the US Dollar (USD). Conversely, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut interest rates to stimulate borrowing, putting pressure on the Greenback.

What is the schedule for the Fed’s monetary policy meetings?

At eight policy meetings each year, the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) reviews the state of the economy and decides on monetary policy. Twelve Fed officials participate in the FOMC: the seven Board of Governors members, the president of the Federal Reserve Bank of New York and four of the other eleven regional Reserve Bank presidents. The latter serve rotating one-year terms.

How does Quantitative Easing (QE) work, and what does it mean for USD?

When conditions become extreme, the Federal Reserve may turn to Quantitative Easing (QE), a policy that substantially expands the supply of credit in a stalled financial system. Used in crises or periods of exceptionally low inflation, this unconventional measure was the Fed’s preferred response during the Great Financial Crisis in 2008. Under QE, the Fed prints additional Dollars to purchase high-grade bonds from financial institutions. The policy generally puts downward pressure on the US Dollar.

How does Quantitative Tightening (QT) work, and what does it mean for the US Dollar?

As the opposite of QE, Quantitative tightening (QT) involves the Federal Reserve halting bond purchases from financial institutions. It also refrains from using principal repaid on maturing bonds in its portfolio to buy new bonds. This process generally supports the value of the US Dollar.