EUR/USD surrenders intraday gains after posting a fresh five-month high near 1.0955 in Tuesday's North American session. The major currency pair falls back as the US Dollar (USD) attracts bids ahead of the Federal Reserve's (Fed) interest rate decision, which will be announced on Wednesday. The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, rebounds from the five-month low of 103.20.
According to the CME FedWatch tool, the Fed is almost certain to keep borrowing rates steady in the range of 4.25%-4.50% on Wednesday. This would be the second straight policy meeting in which the Fed will leave interest rates unchanged.
Traders have remained increasingly confident about the Fed maintaining a status quo on Wednesday as officials have been arguing in favor of a "wait and see" approach amid uncertainty over the economic outlook under the leadership of US President Trump. He has been threatening to introduce reciprocal tariffs, a situation in which the US will impose similar levies charged by other nations on the same products.
Market participants expect that Trump's tariffs could be inflationary and lead to economic turbulence. A slew of US officials, including the President, have not ruled out that Trump's economic policies could lead the economy to a recession.
Increased geopolitical uncertainty from Trump's tariff agenda has forced global organizations to slice US Gross Domestic Product (GDP) growth forecasts. On Monday, the Organization for Economic Cooperation and Development (OECD) stated that the US economic growth could decelerate to 2.2% in 2025 and 1.6% in 2026 after expanding at a robust pace of 2.8% in 2024. The agency also warned that higher and broader increases in trade barriers would hit growth and boost inflation growth globally.
EUR/USD surrenders intraday gains ahead of German debt vote
EUR/USD retreats from five-month high ahead of voting on the German debt restructuring deal in the Bundestag lower house of Parliament. German leaders will vote on passing an infrastructure fund worth 500 billion Euros (EUR) and ease borrowing limit to boost defense spending.
The German debt deal is highly likely to get majority votes as Franziska Brantner-led-Greens agreed last week to support likely chancellor Frederich Merz-led-Christian Democratic Union (CDU) and the Social Democratic Party (SDP) for bringing an end to German's fiscal conservatism, which it adopted after the 2008 sub-prime crisis.
Market participants expect that the massive surge in the German borrowing limit will accelerate economic growth and inflation. Such a scenario is favorable for the Euro, given that Germany is the Eurozone's locomotive. The positive impact of the German debt increase plan is already visible in the Euro, which has performed strongly in the last weeks.
Firm optimism over the German debt deal has also lifted expectations that the European Central Bank (ECB) could pause the monetary easing cycle after reducing interest rates six times since June 2024. ECB policymaker and Austrian Central Bank Governor Robert Holzmann said on Friday that the central bank could keep interest rates steady in the April policy meeting as United States (US) President Donald Trump's tariff agenda and defense spending have prompted risks of a resurgence in inflationary pressures.
Ahead of voting on German debt deal, German ZEW Economic Sentiment Index increased significantly to 51.6 in March from 26.0 in February, beats estimates of 48.1. The Current Situation Index improved to -87.6 from -88.5 seen last month but missed expectations of -80.5. The Eurozone ZEW Economic Sentiment Index came in marginally higher at 39.8 than expectations at 39.6 in March and significantly higher than 24.2 in February.
In Tuesday's session, investors will also focus on the US- Russia talks for a ceasefire in Ukraine. Last week, Ukraine agreed to a 30-day ceasefire plan after discussions with US officials in Saudi Arabia. On Monday, the European Union (EU) Foreign policy chief Kaja Kallas said the conditions demanded by Russia to agree to a ceasefire showed Moscow does not really want peace, Reuters report.
Source: Fxstreet
