What to Expect from Euro-Dollar into Fed & ECB Calls

Above: File image of Christine Lagarde. Image by Dominique HOMMEL. © European Union - Source: EP

A tactical preview of the euro to dollar exchange rate heading into the big ECB and Fed decisions.

Euro-dollar is currently hovering in the 1.15-1.18 band (mid-to-upper end of that), and traders are looking to the two big central bank decisions to change that.

First up is the Federal Reserve decision on Wednesday, followed by Thursday's European Central Bank decision.

The Fed is widely expected to cut interest rates by 25 basis points this evening.

Analysts at Commerzbank point out the market has already priced that in, so it would take a surprise to move the dollar significantly.

The reasoning behind the Fed move, according to Commerzbank, is that the labour market risk is rising rather than inflation being out of control.

That means the rate cut is more of a response to employment concerns, not a shift in inflation dynamics.

On the Euro side, Commerzbank argues the ECB seems comfortable where it is now (deposit rate around 2 %). They do not expect a surprise from ECB tomorrow.

Because both major central bank decisions are "known knowns" to a large degree, EUR/USD may just stay in its current range rather than making a dramatic move.

They also note that geopolitical/trade developments (for example talks between Donald Trump and Xi Jinping) may offer more upside risk for volatility than the central bank decisions themselves.

What to look out for:

If the Fed reframes its forward guidance (for example, signalling more aggressive cuts than expected), this could give the dollar extra weakness, pushing EUR/USD upwards. But Commerzbank think that is unlikely.

If the ECB gives unexpectedly hawkish language or signals policy tightening rather than neutral, that could support the euro. But again analysts expect "no reassessment".

A surprise event in the trade/geopolitical space (for example escalation of U.S.-China tensions) could trigger a larger move in EUR/USD than either central bank.

But headlines on the eve of the central bank decisions suggest a notable de-escalation is underway between China and the U.S.

Tactical Implications for EUR/USD

Commerzbank suggest the ~1.15-1.18 zone remains relevant. A sustained breakout beyond that would require a materially surprising outcome from both, or either of the two central banks.

If you’re waiting for EUR/USD to go on a big run immediately after the Fed/ECB meetings, don’t hold your breath. The probability of a major move is low, according to this research.

If you already hold positions, you might treat this as a 'stay the course' period rather than a time to reposition dramatically.

If you are active and want to hedge, it may be a relatively inexpensive moment given the low implied volatility; you could consider hedges in case surprise events pop up.