Fed and ECB Decisions in Focus.

• EUR/USD Gains on Fed Rate Cut Expectations: Markets anticipate a 50bp interest rate cut by the Federal Reserve, boosting EUR/USD, though a smaller 25bp cut could trigger profit-taking on the Euro.
• Technical Resistance at 1.12 for EUR/USD: Analysts highlight a key resistance level of 1.12, with further gains possible if the Fed cuts rates by 50bp, narrowing the gap between U.S. and European bond yields.
• ECB Rate Cuts Expected but Uncertain: The ECB is expected to continue lowering rates, but policymakers warn against moving too fast due to inflation risks; the next cut may come in December.
• Pound’s Rally Could Stall: GBP/USD has risen due to Fed rate cut expectations and steady UK rates, but a smaller-than-expected Fed cut could halt the Pound’s momentum.
• Market Risks Around Fed’s Decision: A 75% chance of a 50bp Fed cut has been priced in, but if the cut is only 25bp, the Dollar could rebound sharply, impacting EUR/USD and GBP/USD.

USD: EURUSD Surges on Fed Rate Cut Expectations The EUR/USD exchange rate kicked off the week with fresh momentum as markets anticipate a 50 basis point (bp) interest rate cut by the Federal Reserve on Wednesday. This expectation has lowered U.S. Treasury bond yields, narrowing the gap between U.S. Treasuries and European bonds, boosting the EUR/USD. However, Société Générale analysts note that the gap hasn’t fully closed, hinting at potential further gains. “A return to 1.12, the post-Jackson Hole high, is possible if the Fed cuts by 50bp,” says Kit Juckes, head of FX analysis at Soc Gen. Conversely, a smaller 25bp cut would disappoint, potentially leading to profit-taking on EUR/USD. From a technical standpoint, Tanmay Purohit, a technical analyst at Société Générale, highlights that EUR/USD has broken out from a symmetrical triangle, setting 1.12 as a key resistance level. Markets currently see a 75% chance of a 50bp cut, up from just 30% a week ago, driven by unconfirmed media reports. If the Fed opts for a 25bp cut, the Dollar could recover sharply, with analysts predicting a drop in GBP/USD.

EUR: ECB Faces Uncertainty Over Rate Cut Pace The European Central Bank (ECB) also faces uncertainty over its rate-cutting trajectory. While additional cuts are expected, Governing Council member Martins Kazaks warns against moving too quickly due to inflation risks. The pace of future cuts will depend on inflation trends in the service sector and the state of Europe’s economy. ECB President Christine Lagarde recently suggested there is no set path for rate decisions, and data will drive the next steps, hinting that the next cut may come in December. Barclays and Danske Bank strategists have also noted that the ECB’s rate cuts might progress more slowly than markets anticipate. Kazaks expects rates to eventually settle at around 2.5% by mid-next year, a significant drop from the current 3.5%.

GBP: Pound’s Rally Against Dollar at Risk of Stalling The British Pound has enjoyed a strong rise against the U.S. Dollar, with the GBP/USD exchange rate climbing to 1.3210, just shy of its 2025 high. The surge has been driven by expectations of a 50bp Fed rate cut, coupled with the Bank of England’s decision to leave rates unchanged. Despite the recent strength, HSBC analysts warn that the Pound’s rally could stall. As markets now predict a 75% chance of a 50bp Fed cut, a smaller 25bp move could trigger a rebound in the Dollar, potentially driving GBP/USD lower. Senior EM FX Strategist at HSBC, Clyde Wardle, cautions that the Pound is vulnerable to a less aggressive Fed cut, especially considering the current market positioning.