The EUR/USD currency pair edged lower on Wednesday, trading around 1.1700 during Asian hours, as the US Dollar (USD) gained ground despite expectations of a forthcoming Federal Reserve (Fed) rate cut.
The pair remains subdued after registering roughly 0.5% losses in the previous session, reflecting persistent market uncertainty amid diverging central bank policy signals and mixed economic data. This article from Solancie offers readers a clear and thorough explanation of the subject.
US Dollar Gains Amid Fed Rate Cut Speculation
The US Dollar strengthened even as market participants increasingly priced in a potential 25-basis-point (bps) rate cut by the Fed at the upcoming September policy meeting. According to the CME FedWatch tool, the probability of such a cut now exceeds 93%, up from 86% a week ago.
The firming likelihood of a monetary easing did little to dent USD demand, as traders sought safe-haven positioning amid growing global economic and geopolitical uncertainties.
Investors are closely monitoring the US labor market, with focus turning to the upcoming benchmark revisions for Nonfarm Payrolls. The Bureau of Labor Statistics (BLS) indicated that the March 2025 Nonfarm Employment numbers are expected to be revised down by 911,000, equivalent to about 76,000 fewer jobs per month.
This signals a weaker labor market than previously estimated, potentially reinforcing the case for Fed easing later this month. The final benchmark revision will be released in February 2026 alongside the January 2026 Employment Situation report.
Traders Await Key US Inflation Data
Market participants are also eyeing upcoming inflation releases for additional insights into Fed policy direction. The August US Producer Price Index (PPI) is scheduled for release on Wednesday, followed by the Consumer Price Index (CPI) on Thursday.
Analysts suggest that inflation trends could play a pivotal role in determining whether the Fed proceeds with a rate cut, with any surprise readings likely to impact the EUR/USD trajectory in the near term.
European Central Bank Expected to Maintain Rates
On the other side of the Atlantic, the European Central Bank (ECB) is widely anticipated to keep interest rates unchanged for the second consecutive meeting on Thursday.
This reflects steady economic growth in the Eurozone and inflation hovering near target levels. Traders will closely scrutinize any forward guidance from the ECB regarding monetary policy for the remainder of 2025, as subtle cues could influence the EUR/USD outlook.
Despite the ECB’s steady stance, the euro (EUR) struggled against the resurgent US Dollar, highlighting the influence of divergent central bank policies. While the Fed signals a potential loosening cycle, the ECB appears committed to policy stability, contributing to a subdued EUR/USD sentiment.
Geopolitical Risks Add Market Pressure
Beyond central bank dynamics, geopolitical developments are adding another layer of uncertainty. On Tuesday, Poland placed its air defenses on high alert, following warnings from Ukraine’s Air Force regarding a suspected Russian drone incursion into Polish airspace, a breach of NATO territory.
Heightened geopolitical tensions in Eastern Europe could amplify safe-haven flows into the US Dollar, further weighing on the EUR/USD pair.
Meanwhile, domestic political issues in France are also in focus. The French parliament voted on a motion of no confidence against Prime Minister François Bayrou, as parties failed to agree on budget cuts. This political instability forced President Emmanuel Macron to appoint the country’s fifth Prime Minister in less than two years, creating potential headwinds for the euro.
Technical Outlook for EUR/USD
From a technical perspective, EUR/USD remains under pressure near 1.1700, having tested resistance around 1.1750 in previous sessions. Short-term traders may watch for support levels near 1.1680, while any break above 1.1750 could signal a potential retracement rally.
Key economic indicators, including US PPI/CPI readings, the Fed rate decision, and ECB guidance, are likely to remain primary drivers of the pair’s near-term direction.
Given the divergence in central bank policies, a cautious approach is warranted. The USD’s strength amid expected Fed cuts underscores the market’s sensitivity to macroeconomic surprises, while EUR/USD volatility may persist as investors balance monetary policy expectations with geopolitical and political risks.
Conclusion
In summary, EUR/USD slipped toward 1.1700 as the US Dollar strengthened, despite rising bets on a Fed rate cut. The ECB’s likely neutral stance, combined with weaker US labor market signals and geopolitical tensions in Eastern Europe, continues to shape market sentiment.
Traders remain focused on upcoming US inflation data, the Fed’s policy path, and any ECB guidance, all of which will be crucial in determining the direction of EUR/USD in the near term.
Market participants are advised to monitor macroeconomic releases, central bank statements, and geopolitical developments, as these factors collectively dictate short-term currency fluctuations and EUR/USD volatility.
