Chart of The Day – EUR/USD

EUR/USD is posting a modest pullback today, following a sharp move higher from around 1.135 to 1.152. Today may prove pivotal for the pair, as the market awaits the Fed decision and updated projections scheduled at 5 PM GMT today. The base-case scenario for the March FOMC meeting assumes no change in interest rates and a continuation of the Fed’s cautious, wait-and-see approach amid elevated geopolitical uncertainty linked to the Middle East conflict.

• The key element of the meeting will not be the decision itself, but the updated rate projections. The dot plot may shift in a more hawkish direction, which would support the US dollar and put downward pressure on EURUSD. Some FOMC members are likely to scale back the rate cuts they had previously projected.
• As a result, the median outlook is finely balanced, with the Committee potentially split almost evenly. A scenario in which half of the members no longer see room for cuts, while some begin to consider hikes, would reinforce the relative rate advantage of the US and favor USD strength against the euro.
• In a more hawkish outcome, if additional members shift toward projecting a rate hike, the market could react with further downside in EURUSD. At the same time, even a relatively dovish scenario—with a slightly higher projected rate path—would limit the pair’s upside potential.
• The key shift lies in delaying and reducing the scale of rate cuts, suggesting that the Fed–ECB policy divergence may remain supportive for the dollar for longer.
• Persistently elevated core inflation in the US continues to underpin the case for maintaining restrictive policy, limiting the scope for a sustained weakening of the dollar.
• While softer labor market data may temporarily support dovish expectations and offer some relief to EURUSD, its impact is likely to remain limited without a clear improvement in the inflation trend.
• Markets will be particularly sensitive to whether the Fed begins to openly discuss the possibility of rate hikes as the next move. Even a small increase in the number of members signaling such a scenario could trigger USD strength.
• In recent days, market pricing has shifted toward a less dovish outlook, with expectations now pointing to just one rate cut this year and one next year, likely in the second half. This already provides some support to the dollar, but further repricing could amplify the move.
• The base case assumes a divided Fed: some members see no cuts, moderates lean toward a prolonged pause, and doves limit expectations to a single cut late in the year. The most hawkish members continue to project a hike, keeping downside risks for EURUSD in place.

As a result, even without a rate change, the March meeting could significantly influence EURUSD through shifts in policy expectations. If markets gain confidence in a more hawkish path, further downside in the pair is likely. However, if dovish signals emerge—especially from Powell – a move back above 1.16 cannot be ruled out.

EURUSD (D1 interval)

Source: xStation5

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