The Euro (EUR) is holding near multi-year highs against the US Dollar (USD) on Wednesday, with EUR/USD consolidating after a strong rally that lifted the pair to its highest level since September 2021. Investors are keeping positions light ahead of the Federal Reserve’s (Fed) policy decision at 18:00 GMT.
At the time of writing, EUR/USD trades around 1.1846 in the US session, having reached 1.1878 on Tuesday. The move was fueled by broad-based dollar weakness as markets priced in expectations of a dovish Fed. Momentum has since cooled, with profit-taking and pre-Fed caution limiting follow-through.
Fed outlook in focus
The Fed is widely expected to cut rates by 25 basis points (bps), lowering the federal funds rate to the 4.00%-4.25% range. This would mark the first rate cut of 2025. While the move itself is fully priced in, the updated dot plot and Chair Jerome Powell’s press conference will be key in shaping EUR/USD’s next leg.
A dovish message signaling an extended easing cycle could open the door for fresh cycle highs in the pair. In contrast, a cautious tone or pushback against aggressive rate-cut bets may trigger a corrective pullback in the Euro.
Eurozone data supports ECB caution
Earlier Wednesday, Eurozone inflation data showed core HICP unchanged at 2.3% YoY in August, while headline inflation eased to 2.0%, just below expectations. The figures align with the European Central Bank’s (ECB) cautious stance. On September 11, the ECB left interest rates unchanged and emphasized that current restrictive levels, if maintained, would help return inflation to target.
Monetary policy divergence emerges
With the Fed preparing to pivot toward rate cuts while the ECB signals a prolonged pause, monetary policy divergence is emerging as a central driver for EUR/USD. The ECB is not expected to ease before mid-2026, whereas the Fed may move more quickly if US growth and labor market data continue to weaken.
This divergence could provide near-term support for further Euro strength. However, follow-through may depend on broader risk sentiment and economic data surprises on either side of the Atlantic.
