FOMC Expected to Hold as EURUSD Keeps Rising

The dollar weakened last week, allowing Fibre to hit 4-year highs ahead of an FOMC meeting where the Fed is expected to hold rates unchanged, but can it keep rising?

Dollar Passes the Crown to the Euro?

Last week, the . This helped the EURUSD rise to a four-year high, after the ECB made what was widely interpreted as a "hawkish cut." The euro has been among the currencies gaining from dollar weakness, as its central bank is looking to end its easing cycle while the Fed is projected to start easing soon. However, the buck did bounce slightly on Friday as safe-haven flows reasserted themselves amidst the conflict between Israel and Iran. Markets are now looking ahead to the FOMC, which is expected to hold rates unchanged at the end of its two-day policy meeting on Wednesday.

Typically, the interest rate gap between central banks plays a key role in currency pair movements. has become a more important factor for traders. Tariffs are prompting export-orientated countries to reduce their purchases of US Treasury bonds as Congress considers increasing its deficit spending to unprecedented levels. Concerned about the performance of the American economy, flows have fled across the Atlantic in the hope that stimulus spending in the EU could boost returns. However, after a negative reading in Q1 due to technical issues related to trade, the US economy is projected to rebound, with . A relatively strong economy will likely keep the Fed from lowering rates, but whether that translates into a return of investor confidence in the dollar is a different matter.

Focus on What Comes Next

Given the , markets are focused on what the Fed might do next. Currently, the FedWatch Tool shows an . Despite the geopolitical turmoil and softer-than-expected CPI print last week, the markets are still pricing in the same chances that the Fed will cut two times this year. Importantly, the so-called "dot-plot" matrix will be published on Wednesday along with updated forecasts from FOMC members. The last time, a consensus emerged for two rate cuts in the second half of the year, but some analysts are worried that this time might show only one. That could provide a more hawkish impression for the markets.

on the US economy, so traders might end up selling the dollar amid tariff uncertainty despite expectations of higher rates. In that case, the EURUSD could see further gains on the back of continued dollar weakness. On the other hand, progress on the trade front or more convincing signs that the US economy is growing faster than expected could drag on the currency pair.

EURUSD Pending Symmetrical Triangle Breakout

Following the surge to 1.1361, the EURUSD has entered a consolidation phase that resembles a symmetrical triangle pattern, pending a breakout near the apex. At the bottom, the ‘autotrend’ connects at the 1.1143 and 1.1490 levels, while at the top, resistance below the June peak lies at 1.1609. Triangles in ascending markets typically break to the upside, with a break above the middle band at 1.1573 opening the door to the second–degree standard deviation near 1.1597 first.

Source: SpreadEx / EURUSD

Key Takeaways

The Fed is expected to keep interest rates unchanged at its upcoming meeting. Despite the interest rate gap between central banks typically driving currency movements, factors such as tariffs and safe-haven flows have become increasingly influential lately. The markets remain focused on the Fed's future rate path, with an 80% probability priced in for no rate cut until September, and the updated "dot-plot" forecasts, which could be more hawkish and weigh on the US economy. Nonetheless, progress on the trade front or stronger US economic growth could support the dollar and drag on the EURUSD, which appears to be forming a symmetrical triangle pattern pending a potential upside breakout near the apex.