EUR/USD oscillates as investors await interest rate policy twists

The US dollar strengthens, yet Euro holds firm, with the EUR/USD pair at 1.0746 amid policy shifts anticipation. Anticipated Fed’s skip and hike could reshape US-EU interest rate dynamics, potentially favouring Euro.

Possible US economic downturn might trigger ‘dollar smile’ as markets eye key economic indices. The EUR/USD pares some of its earlier gains, still trading in a positive territory amidst a busy week in the economic agenda, with major central banks set to adjust their monetary policies.

The US dollar strengthened ahead of Wednesday’s Fed decision but is yet to overshadow a solid Euro (EUR). At the time of writing, the EUR/USD exchanges hands at 1.0746, almost flat. Market awaits key monetary moves as the follar strengthens against the resilient Euro.

Wall Street is trading with modest gains ahead of the Fed’s June monetary policy meeting. The Fed is expected to keep rates unchanged, as shown by money market futures, with the CME Fed WatchTool odds for no change in June at around 71%.

Nonetheless, for the next month, odds for a 25 bps lie above the 50% threshold, cementing the case for a Fed skip followed by a rate increase.

However, the recent two monetary policy decisions of significant central banks surprised the markets with unexpected decisions by the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC). Although, at a minimum, EUR/USD traders should be aware the Fed could rock the boat and lift rates in June.

On the Eurozone front, the economic calendar on Monday was light, but it would increase the tone on Tuesday with Germany’s inflation. On Thursday, the European Central Bank is expected to raise rates by 25 bps, which, according to estimates for the Fed and the ECB’s decision, would reduce the interest rate differential between the US and the EU, favoring the latter.

That said, upside pressure on the EUR/USD is expected. Still, economic deterioration in the US could trigger the “dollar smile” theory, which supports the greenback in phases of global economic stress.

The US economic agenda will feature May’s Consumer Price Index (CPI) and the NFIB Business Optimism Index. On the EU front, the German and Spain Harmonised Index of Consumer Prices (HICP) for both countries and the ZEW Economic Sentiment.