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

• EUR/USD inches up as the US Dollar softens before the Fed’s rate announcement.
• An expected Fed rate hold puts the spotlight on prospects for a December increase.
• The Euro remains exposed to France’s budget crisis ahead of Thursday’s ECB monetary policy decision.

With the Federal Reserve’s (Fed) monetary policy announcement scheduled for 18:00 GMT, the US Dollar (USD) has halted its rise, allowing EUR/USD to trade with an upward bias in Wednesday’s American session. The pair stands near 1.1134 at the time of writing, having briefly slipped to 1.1113, its weakest reading since May 2025.

Having earlier touched a new two-week peak of 102.49, the US Dollar Index (DXY) is trading 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 anticipated to hold interest rates at 3.75%-4.00%. Attention among traders centres on whether its message will justify continued bets on a December rise, with policymakers still committed to returning inflation to the central bank’s 2% objective.

Continuing tensions in the Middle East leave inflation risks skewed upwards. Following two days of declines, oil prices are recovering after the Wall Street Journal reported that Washington had alerted Gulf states to a potential military operation against Iran after the US midterm elections.

An 85% chance of a December rate increase is currently priced in by traders, according to the CME FedWatch Tool. Any indication that additional tightening remains an option could revive the US Dollar’s gains and put pressure on the Euro. A less hawkish message, by contrast, could lead traders to pare those expectations, allowing EUR/USD to recover.

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

In their assessment, "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," with the Euro consequently exposed if US policy expectations continue to favour the Dollar.

Having increased rates by a cumulative 50 bps this year, the European Central Bank (ECB) is widely anticipated to maintain its deposit rate at 2.50% when it delivers Thursday’s monetary policy decision. Traders will scrutinise the announcement for indications of a potential December increase and policymakers’ assessment of the trade-off between persistent inflation driven by energy prices and threats to growth.