Euro edges up as the Fed holds a day before the ECB

EUR/USD edges up on the Fed's hold but stays below its high just above 1.1150.
The Fed's rate stays 1.25-1.50 points above the ECB's 2.50% deposit rate.
The ECB decides Thursday, with a hold expected there as well before December.

After the Fed's hold, Thursday's decision from the European Central Bank (ECB) is the week's last chance to change EUR/USD's rate gap, and a hold is expected there too. The pair rose on the statement and won back part of a slide from the session high just above 1.1150. It's trading below that high, in the upper half of Wednesday's range.

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The ECB decided on September 10 to raise its deposit rate to 2.50%, its second increase this year. The rise took effect on September 16, the day the Fed went to 3.75%-4.00%. Neither has moved since, so the Fed's rate is still 1.25-1.50 points above the ECB's, the gap EUR/USD has traded on since mid-September.

Most economists expect the ECB to hold on Thursday and raise in December, the month traders had given a Fed hike about an 80% chance before the decision. If both raise by a quarter-point, the gap EUR/USD trades on ends the year exactly where it has been since September 16.

On the calendar

September's Personal Consumption Expenditures Price Index (PCE) and US third-quarter Gross Domestic Product (GDP) are due at 12:30 GMT on Thursday. ECB President Lagarde's press conference follows the ECB's 13:15 GMT decision at 13:45 GMT. The euro area's first estimate of third-quarter GDP comes at 10:00 GMT on Friday, so both sides of EUR/USD's gap report growth before the weekend.

Fed Chair Warsh takes questions on Wednesday at 18:30 GMT, the last word on US rates before the ECB decides. He said on October 16 that hotter inflation hadn't changed his view of the economy, and anything he adds about December reaches EUR/USD through the US side of the gap.

On the charts

EUR/USD has climbed from a session low just above 1.1100, reached after a slide from where it started the day, and gave back almost half of that climb in the bars before the statement. The decision bar landed on intraday momentum that was already oversold.

EUR/USD 5-minute chart

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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