EUR/USD declines as US Dollar strengthens ahead of Fed decision

• EUR/USD faces selling pressure near 1.0950 as the US Dollar strengthens ahead of the Fed's monetary policy decision.
• The Fed is expected to keep interest rates steady in the range of 4.25%-4.50%.
• The Euro drops despite German leaders agreed on increasing the borrowing limit in the lower house of Parliament.

EUR/USD falls sharply to slightly below 1.0900 in Wednesday's European session after posting a fresh five-month high near 1.0955 the previous day. The major currency pair weakens as the US Dollar (USD) performs strongly ahead of the Federal Reserve's (Fed) interest rate decision at 18:00 GMT. The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, jumps to near 103.70 after revisiting a five-month low around 103.20 on Tuesday.

According to the CME FedWatch tool, the Fed is almost certain to keep borrowing rates steady in the range of 4.25%-4.50%. This would be the second straight policy meeting in which the Fed will leave interest rates unchanged. 

Traders have remained increasingly confident about the Fed maintaining a status quo on Wednesday as officials have been arguing in favor of maintaining a "wait and see" approach until they get clarity over the United States (US) economic outlook under the leadership of President Donald Trump.

Market participants expect that Donald Trump's tariff policies could result in a resurgence in inflationary pressures in the near term as the impact of higher import duties will be borne by US importers who will pass on the impact to consumers.

Apart from the interest rate decision, investors will also focus on the Fed's dot plot, which shows policymakers' collective forecast for the interest rate outlook in the medium and longer term. In the December meeting, Fed officials projected two interest rate cuts in 2025.

Daily digest market movers: EUR/USD drops as Euro underperforms

• A sharp decline in the EUR/USD pair from the five-month high is also driven by the Euro's (EUR) underperformance across the board on Wednesday. The Euro drops even though German leaders approved likely Chancellor Frederich Merz's debt restructuring plan on Tuesday at Bundestag lower house Parliament, aiming to stimulate economic growth and boost defense spending.
• Market participants expect that an end to German fiscal conservatism after over a decade will be inflationary and pro-growth for the economy. Such a scenario will force the European Central Bank (ECB) to turn cautious about the current monetary expansion cycle. The ECB has reduced interest rates six times since June 2024.
• Also, investors expect that US President Trump's tariff agenda could accelerate price pressures in the Eurozone. On Tuesday, US Treasury Secretary Scott Bessent confirmed in an interview with Fox Business that each country will receive a number on "April 2" that we believe represents their "tariffs".
• On the geopolitical front, US President Trump and Russian leader Vladimir Putin agreed to seek an inmediate 30-day ceasefire between Russia and Ukraine on energy and infrastructure targets.
• "We agreed to an immediate Ceasefire on all Energy and Infrastructure, with an understanding that we will be working quickly to have a Complete Ceasefire and, ultimately, an END to this very horrible War between Russia and Ukraine," Trump said in a post on Truth Social on Tuesday. 

Technical Analysis: EUR/USD struggles around 1.0950

EUR/USD struggles to extend its upside above 1.0950. However, the long-term outlook of the major currency pair remains firm as it holds above the 200-day Exponential Moving Average (EMA), which trades around 1.0660.

The pair strengthened after a decisive breakout above the December 6 high of 1.0630 on March 5. 

The 14-day Relative Strength Index (RSI) wobbles near 70.00, suggesting that a strong bullish momentum is intact.

Looking down, the December 6 high of 1.0630 will act as the major support zone for the pair. Conversely, the psychological level of 1.1000 will be the key barrier for the Euro bulls.