EUR/USD Outlook; Fed Decision to Dominate Attention This Week

On Monday, the euro experienced a decrease of more than 0.4% compared to the U.S. dollar, with the EUR/USD exchange rate dropping below 1.0800 at one point, marking a low for multiple weeks.

In recent days, the euro has been on the defensive following ECB President Christine Lagarde's inability to challenge market expectations of significant interest rate cuts during the January meeting. Additionally, several other policymakers have indicated that a rate cut is likely the next move.

Losses for the euro could accelerate if the FOMC surprises this week with a hawkish stance at the end of its first meeting of 2024. While the central bank is expected to maintain its policy settings, it may provide new guidance on future interest rates.

Given the robust performance of the U.S. economy and the resilient labor market, there's a possibility that the Fed might vigorously oppose premature and drastic easing measures. Such a scenario would pose challenges for the EUR/USD exchange rate.

Alternatively, if the FOMC adopts a dovish stance, U.S. Treasury yields could plummet, pushing the EUR/USD exchange rate higher. This scenario should not be completely ruled out, as progress on the U.S. inflation front may nudge the Fed to start laying the groundwork for rate cuts in the coming months.