Fed Decision Set to Determine EUR/USD Direction

The upcoming Federal Reserve decision is expected to have a significant impact on the EUR/USD exchange rate, which has been trading within a narrow range since late June. According to CME FedWatch odds, there's still a 68.5% chance of no change in interest rates, but hawkish rhetoric from Kevin Warsh and growing support for a hike among FOMC members have pushed the odds up to over 30%. This has led economists to question what to expect from the decision.

The European Central Bank held its last meeting on Thursday, reaffirming the 2% inflation target while acknowledging that energy-driven inflation risks remain due to the Middle East conflict. The ECB did not make any changes to interest rates, which are currently at 2.25%. Eurozone inflation cooled down to 2.8% in June, but sticky services inflation near 3.5-4% keeps the door open for a potential rate change.

As the EUR/USD chart shows, the pair has been consolidating within a defined range since late June, squeezed between an ascending trendline and a descending trendline. The 200-period EMA continues to slope lower above price, reinforcing a cautious backdrop ahead of tonight's Fed decision.