EUR/USD Forecast: A hawkish Fed hold could trigger a leg lower

• EUR/USD continues to fluctuate between key technical levels.
• The Fed is widely expected to leave the policy rate unchanged at 5.25%-5.5%.
• The revised Summary of Economic Projections and Powell’s comments could impact the USD’s valuation.

EUR/USD climbed to a fresh weekly high near 1.0830 in the early American session on Tuesday but lost its bullish momentum. Early Wednesday, the pair fluctuates in a narrow channel at around 1.0800 as investors gear up for the Federal Reserve (Fed) policy announcements.

The data from the US showed that inflation, as measured by the change in the Consumer Price Index (CPI), edged lower to 3.1% on a yearly basis in November as expected. Meanwhile, the Core CPI, which excludes volatile food and energy prices, rose 0.3% on a monthly basis to match the market consensus. Investors refrained from taking large positions after inflation figures and made it difficult for EUR/USD to find direction.

The Fed is expected to leave the policy rate unchanged at 5.25%-5.5% following the last policy meeting of 2023. Since such a decision is already priced in, investors will scrutinize the revised Summary of Projections (SEP), also known as the dot plot, for fresh clues regarding the timing of a possible policy shift in 2024.

Markets see a more than 40% probability that the Fed will reduce the policy rate by 25 basis points as early as March, according to the CME Group FedWatch Tool. In case Fed Chairman Jerome Powell pushes back against this market expectation and repeats that it’s still too early to even think about a rate reduction, that could be seen as a hawkish hold and help the USD gather strength against its rivals. 

On the other hand, EUR/USD could gather bullish momentum if the dot plot points to at least 100 basis points of rate cuts next year and Powell leaves the door open for a rate cut in the first half of the year by adopting an optimistic tone about the inflation outlook.

EUR/USD Technical Analysis

EUR/USD remains stuck between 1.0750 and 1.0830, where the 100- and 200-day Simple Moving Averages (SMA) are located. The pair needs to move out of that channel to determine its next short-term direction. With a break above 1.0830, EUR/USD could target 1.0860 (100-period SMA on the 4-hour chart) and 1.0900 (psychological level, static level).

On the downside, 1.0700 (psychological level, Fibonacci 61.8% retracement) and 1.0660 (static level) could be set as next bearish targets if 1.0750 support fails.