The EUR/USD pair is trading around the 1.1125 mark on Wednesday, extending its decline for the fifth consecutive session. The single currency is on track to end October as the worst-performing currency among developed nations, shedding approximately 1.7% against the US dollar over the month. Today and tomorrow, the spotlight is on the Federal Reserve and ECB meetings. The core problem for the euro is that both events are shaping up unfavorably for it: the hawkish stance of the US regulator stands in stark contrast to the forced caution of its European counterpart.
The first major headwind comes from the Federal Reserve meeting. The market is virtually certain that the regulator will hold rates steady, with the probability of this outcome priced in at nearly 93%. However, the key driver will not be the decision itself, but rather the rhetoric of Chairman Kevin Warsh during the press conference, as he may shed light on the prospects of a December rate hike. US inflation remains stubbornly above the target level, while elevated oil prices and geopolitical risks in the Middle East reinforce the rationale for maintaining a tighter monetary policy. Ahead of the Fed’s policy announcement, the yield on 10-year US Treasury notes has once again climbed above 5%, while the US Dollar Index (DXY) has consolidated near a two-week high around 102.20. Any hint from Warsh regarding a potential rate hike in December will only accelerate the sell-off in risk assets.
The second major factor weighing on the euro is tomorrow’s ECB meeting. Following September’s rate hike, the European regulator is expected to hold rates steady at 2.50% and adopt a wait-and-see approach. The ECB’s quarterly bank lending survey, published just a day earlier, revealed that the impact of previous rate hikes is becoming increasingly pronounced. If this trend continues, it could diminish the need for further tightening. Furthermore, the ongoing budget crisis in France supports a more cautious stance from the European regulator. Given that French government bond yields are already at multi-decade highs, the ECB will likely prefer to leave rates unchanged, as a hike would only exacerbate the debt crisis in one of the EU’s largest economies. In any case, volatility in the French government bond market and lingering concerns over the country’s public finances continue to weigh heavily on the euro, leaving the pair vulnerable to a decline toward the 1.1000 level.
