- EUR/USD traders seem non-committed on Monday, though the downside seems cushioned.
- The divergent ECB-Fed policy expectations might continue to act as a tailwind for the major.
- Traders might also opt to wait on the sidelines ahead of the FOMC decision on Wednesday.
The EUR/USD pair kicks off the new week on a subdued note and oscillates in a narrow band, around the 1.1725-1.1720 region during the Asian session. The downside, however, seems limited amid the divergent European Central Bank (ECB)-Federal Reserve (Fed) policy expectations and ahead of this week’s key central bank event risk.
As was widely anticipated, the ECB left interest rates unchanged last Thursday and maintained an upbeat view on growth and inflation. Moreover, the central bank added that it would follow a meeting-by-meeting, data-dependent approach and was not pre-committing to a specific path for interest rates. This, in turn, dampened expectations for any further cut in borrowing costs, which continues to underpin the shared currency and offer support to the EUR/USD pair.
In fact, traders have now reduced the odds of another ECB rate cut before spring to just 40%. This gives the euro a policy advantage against the Fed, which is universally expected to cut rates as early as this week. In fact, the CME Group’s FedWatch Tool indicates an over 90% chance of a 25-basis-point (bps) rate cut and a small possibility of a jumbo rate cut by the Fed on Wednesday. This keeps the US Dollar (USD) bulls on the defensive and also acts as a tailwind for the EUR/USD pair.
Bulls, however, seem reluctant and opt to wait for the outcome of a two-day FOMC monetary policy meeting on Wednesday before placing fresh bets. Traders will look for cues about the Fed’s future rate-cut path, which, in turn, will play a key role in influencing the near-term USD price dynamics and providing some meaningful impetus to the EUR/USD pair. Nevertheless, the fundamental backdrop suggests that any corrective pullback could be seen as a buying opportunity.
