USD decline continues as we head into the US interest rate decision on Wednesday

Markets are bracing for action this week as the US, Australia, Switzerland and Canada all announce their interest rate decisions and economic forecasts. We have a raft of employment data from the US, Bank of England speeches alongside UK services and manufacturing data on Friday. Wednesday evening - the US is expected to cut rates from 4% to 3.75% and the tone of the press conference will be all-important for the fate of the USD.

EUR/USD is trading higher on Monday, but has given away most ot the daily gains, and changes hands at 1.1650 after hitting daily highs, near 1.1675. The moderate improvement in the Sentix had failed to lift the Euro, which is going through an "inside day" as the Fed remains front and center this week.

The Fed is widely expected to cut rates by 25 basis points on Wednesday, with Chairman Jerome Powell highly likely to show a hawkish stance, pressured by the sticky inflation levels. FOMC however, is expected to show an unusual amount of dissenters on both sides of the spectrum, which muddies the central bank's path forward.

Sterling also awaits Fed decision. GBP trades calmly against its major currency peers at the start of the week, hovering at around 1.3320 against the USD. In a week in which the UK economic calendar is light, the British currency is expected to be influenced by global events and market expectations for the Bank of England’s monetary policy outlook.

Traders are confident that the BoE will cut interest rates in the policy meeting next week amid weak UK labor market conditions and signs of a slowdown in inflation . The job market data for the three months ending September showed that the Unemployment Rate rose to 5%. Meanwhile, the headline Consumer Price Index report for October showed that inflation stood at 3.6% on an annual basis, the lowest level in four months.

EUR receives initial support from the modest improvement in the Eurozone Sentix Investor Confidence Index, which rose to -6.2 in December from -7.4 in November. The Current Situation index also improved to -16.5, while Expectations strengthened significantly to 4.8, signaling a less pessimistic economic outlook.

GBP/EUR around 1.1400 is new recent lows, but higher than last week.

This recovery comes as comments from European Central Bank member Isabel Schnabel reinforced the idea that growth forecasts could be revised higher at the December meeting. Schnabel said she feels “comfortable” with markets pricing the next ECB move as a rate hike, giving the Euro an immediate boost.

A stronger-than-expected rise in German Industrial Production further supported the currency. Output increased by 1.8% in October, beating expectations of a 0.4% contraction, after a 1.1% rise in September. These figures help ease concerns about the momentum of the region’s largest economy.

Elsewhere
In Japan, the picture is mixed. Gross Domestic Product (GDP) for the third quarter was revised down to -0.6% from -0.4%, pointing to a deeper contraction. On an annualized basis, the economy shrank 2.3%, its sharpest drop since Q3 2023, weakening the Japanese Yen by raising doubts about Japan’s ability to absorb rapid monetary tightening. At the same time, Japanese Government Bond (JGB) yields remain near multi-year highs, supported by market speculation and by the expansionary fiscal stance of Prime Minister Sanae Takaichi’s government.

EUR/JPY trades around 181.10 on Monday, up 0.15%, as fundamental momentum turns more favorable for the Euro at the start of the week. Investors are reacting to a series of encouraging indicators from the Eurozone, contrasting with a more complex environment for the Japanese Yen (JPY), caught between a weakening economy and rising expectations of monetary tightening.