Euro came under pressure ahead of the Fed's decision
The euro today, September 16, remains under pressure in the global currency market. The main focus of FOREX participants is on the US Federal Reserve meeting, which concludes today with an interest rate decision. The Fed's stance and comments from the head of the US central bank, Kevin Warsh, may determine the further direction of the EUR/USD pair.
In the morning, the euro traded around 1.1535 dollars, not far from the monthly low of 1.1523 dollars reached on Monday. Thus, the dollar maintains its advantage over the European currency ahead of the Fed's decision.
Until recently, market participants mostly expected the US rate to remain unchanged, but the situation changed significantly after the latest inflation data. Currently, the futures market estimates the probability of a Fed rate hike of 0.25 percentage points at about 90%.
The current target range for the federal funds rate is 3.50–3.75% per annum. In case of a hike, it could move to the range of 3.75–4.00%. According to a Reuters poll, 85% of the economists surveyed expected exactly that decision.
If the hike occurs, it will be the first Fed rate hike since July 2023.
Why the dollar strengthened
For the dollar, not only the size of the rate hike itself is important, but also the reasons for possible monetary policy tightening.
Inflationary pressure in the US remains elevated, and rising global oil prices further increase the risks of accelerating inflation. Against this backdrop, US Treasury yields have risen noticeably: the yield on 10-year Treasuries climbed to 5% on the eve, the highest level since 2007.
Higher yields on US bonds make dollar-denominated assets more attractive. This creates additional demand for the dollar and, accordingly, pressure on EUR/USD.
What will happen to the euro after the Fed meeting
The main event for the currency market will be not so much the rate hike itself, which is already largely priced in, but the Fed's rhetoric and new economic projections.
If the Fed confirms the rate hike and signals that further policy tightening is possible, the dollar could receive additional support. In that case, EUR/USD could continue to move lower after a recent decline to 1.1530–1.1540 dollars.
However, the opposite scenario is also possible. If the rate is raised, but Kevin Warsh indicates that further hikes are not predetermined, the dollar's reaction could be limited. According to Reuters, such an option could cause the dollar to fall even with the rate hike itself.
Finally, if the Fed unexpectedly keeps the rate unchanged, the market reaction could be much more pronounced. Such a decision currently does not match the main scenario of market participants, so it could cause a noticeable weakening of the US currency.
