- EUR/USD is on the defensive, courtesy of dovish ECB
- Markets have priced in at least two Fed rate cuts for 2019.
- Fed will have a hard time beating market expectations.
EUR/USD will likely trade on the defensive ahead of the Fed, courtesy of rising odds of rate cuts by the European Central Bank (ECB).
The ECB President Mario Draghi hinted at more stimulus on Tuesday, sending the EUR lower across the board.
Notably, the money markets have pulled forward expectations of a 10 basis point rate cut to December from March 2020 seen last week. Further, markets are now also pricing 15 basis point rate cut by June 2020.
As a result, the EUR/USD pair could find acceptance below 1.1180 (Tuesday's low) ahead of the US Federal Open Market Committee (FOMC) rate decision due at 18:00 GMT today. As of writing, the pair is trading at 1.1192, having hit a high of 1.1202 in the Asian session.
Focus on FOMC
The US Federal Reserve is expected to keep rates unchanged today and lay the groundwork for a rate cut later this year. The market is fully pricing in two 25bps rate cuts by the end of the December FOMC meeting and a 50% chance of a third, according to Reuters.
Federal Reserve Preview June 18-19 FOMC: Proto-Easing
With two rate cuts already priced in, the Fed is going to have a hard time beating market expectations. Moreover, with the US stock markets near record highs, the Fed has little room to sound exceedingly dovish.
Add to that the rising odds of ECB rate cuts and the EUR/USD pair looks set for a deeper drop.
That said, a minor bounce could be seen if the Fed does signal two rate cuts by the year-end. However, a bullish reversal in EUR/USD would be confirmed only above the recent high of 1.1348.