EUR/USD steady near four-year highs as Fed decision looms

• Euro consolidates near cycle highs as Fed decision keeps traders cautious.
• The Fed is expected to cut rates by 25 bps, with focus on the dot plot and Powell's guidance.
• Eurozone inflation holds steady, reinforcing the ECB's pause and widening the policy gap with the Fed.

The Euro (EUR) is little changed against the US Dollar (USD) on Wednesday, with EUR/USD pausing a four-day winning streak after hitting its highest level since September 2021 on Tuesday. Traders are holding back from directional bets ahead of the Federal Reserve's (Fed) monetary policy decision due at 18:00 GMT.

At the time of writing, EUR/USD is trading around 1.1846 during the American session. The pair touched a four-year high of 1.1878 on Tuesday, driven by broad-based Greenback weakness as investors priced in a dovish shift from the Fed. The rally has since cooled, as a steady US Dollar and pre-Fed caution prompt traders to lock in profits and reduce exposure ahead of what could be a pivotal update to the central bank's policy outlook.

The Fed is widely expected to deliver a 25 bps cut, lowering the federal funds rate to the 4.00%-4.25% range and marking the first interest rate cut of 2025. While the cut is priced in, the updated dot plot and Fed Chair Jerome Powell's forward guidance will shape the trajectory for EUR/USD.

A dovish signal pointing to an extended easing cycle could push the pair toward new cycle highs, while a more cautious tone or pushback against aggressive rate-cut bets may trigger a corrective pullback in the Euro.

On the Eurozone side, inflation data released earlier on Wednesday showed that core HICP held steady at 2.3% YoY in August, while headline inflation eased to 2.0%, slightly below expectations. The data reinforces the European Central Bank's (ECB) cautious stance. In its September 11 policy decision, the ECB left all key rates unchanged and noted that current levels, if maintained, would significantly help return inflation to target.

With the Fed poised to begin cutting rates and the ECB signaling a prolonged pause, monetary policy divergence is emerging as a key driver for EUR/USD. While the ECB is not expected to ease before mid-2026, the Fed may move more quickly if growth and labor market data continue to deteriorate. This divergence may support further upside in the Euro near-term, although broader sentiment and data surprises on either side could limit follow-through.