17-month lows remain close as euro stabilises ahead of Fed rate decision

EUR/USD gains modestly as the US Dollar softens before the Fed’s rate decision.
December rate hike expectations take centre stage as the Fed is expected to hold rates steady.
Ahead of Thursday’s ECB policy announcement, France’s budget crisis leaves the Euro exposed.

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

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

After setting a fresh two-week high of 102.49 earlier in the session, the US Dollar Index (DXY) is trading near 102.33. The index measures the Greenback against a basket of six major currencies.

An unchanged 3.75%-4.00% interest rate range is widely anticipated from the Fed, following September’s 25-basis-point (bps) increase. With policymakers still committed to restoring inflation to the central bank’s 2% target, traders will assess whether the decision provides grounds to maintain bets on another 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 alerted Gulf states to a possible 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. Should the Fed signal that additional tightening remains an option, the US Dollar could regain upward momentum, putting pressure on the Euro. A less hawkish tone, by contrast, could lead traders to reduce those bets and allow EUR/USD to recover.

In the view of ING analysts, EUR/USD "remains at the lows of the year as broad dollar strength and an unresolved French budget crisis dominate,". Societe Generale strategists describe a Euro that "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 currency.

Their assessment is 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,". The Euro would therefore remain exposed if US policy expectations continue to favour the Dollar.

A steady deposit rate of 2.50% is widely expected when the European Central Bank (ECB) delivers its policy decision on Thursday. Rates have already risen by a cumulative 50 bps this year. Traders will scrutinise the announcement for indications of a potential December increase and policymakers’ assessment of persistent energy-led inflation against growth risks.

Fed: Key Questions Answered

The Federal Reserve’s role and its influence on the US Dollar

Responsibility for US monetary policy rests with the Federal Reserve (Fed), whose dual mandate is price stability and full employment. Interest rate adjustments are its main means of pursuing these objectives. If prices climb too rapidly and inflation exceeds the Fed’s 2% target, the central bank increases interest rates. Higher borrowing costs across the economy make the US more appealing to international investors seeking somewhere to place their funds, strengthening the US Dollar (USD). Conversely, inflation below 2% or an excessively high unemployment rate may lead the Fed to cut rates to stimulate borrowing. This puts pressure on the Greenback.

Eight meetings a year: The Fed’s policy schedule

At eight policy meetings each year, the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) reviews the economy and determines monetary policy. Twelve Fed officials attend the FOMC: the seven Board of Governors members, the president of the Federal Reserve Bank of New York, and four presidents drawn from the other eleven regional Reserve Banks. Those four serve rotating one-year terms.

Quantitative Easing (QE): Its purpose and effect on USD

When conditions become extreme, the Federal Reserve may turn to Quantitative Easing (QE) to substantially expand credit flows through a stalled financial system. This unconventional policy is deployed during crises or periods of exceptionally low inflation. During the Great Financial Crisis in 2008, it was the Fed’s preferred tool. Under QE, the central bank prints additional Dollars to purchase high-grade bonds from financial institutions. The US Dollar typically weakens as a result.

Quantitative Tightening (QT): Its mechanics and US Dollar impact

To reverse QE through quantitative tightening (QT), the Federal Reserve halts bond purchases from financial institutions. It also refrains from using principal repaid on its maturing bond holdings to buy new bonds. The process generally supports the US Dollar’s value.