EUR/USD holds modest gains as markets await Fed interest rate decision

• EUR/USD extends gains for the fifth straight session as the US Dollar weakens following soft Consumer Confidence data.
• US Consumer Confidence falls to 94.6 in October from 95.6 in September, while inflation expectations rise to 5.9%.
• Focus shifts to the Fed's policy decision on Wednesday, with markets fully pricing in a 25 bps rate cut.

The Euro (EUR) trades on the front foot against the US Dollar (USD) on Tuesday as the Greenback softens following disappointing US Consumer Confidence data. At the time of writing, EUR/USD is trading around 1.1654, extending gains for the fifth consecutive session, though momentum remains subdued as traders refrain from taking large directional bets ahead of the Federal Reserve's (Fed) monetary policy announcement on Wednesday.

Data from the Conference Board showed that US Consumer Confidence fell to 94.6 in October from a revised 95.6 in September, marking the second consecutive monthly decline. While the Present Situation Index improved to 129.3, the Expectations Index dropped to 71.5.

Additionally, inflation expectations for the year ahead rose to 5.9%. The soft survey data weighed on the US Dollar, with the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, easing from an intraday high of 98.95 to trade around 98.70 at the time of writing.

Attention now turns to the Fed's interest rate decision. Markets are nearly certain the central bank will cut rates for the second time this year after a quarter-point reduction in September, the first since December 2024. However, as the rate cut is largely priced in, the focus will shift to the monetary policy statement and Fed Chair Jerome Powell's remarks at the post-meeting press conference.

A hawkish cut remains a possible risk scenario if policymakers express confidence in the economy or signal that further easing is unlikely. Conversely, a dovish tone may prevail if officials highlight growing downside risks and hint at additional cuts ahead.

The lack of fresh labor market data due to the ongoing government shutdown, combined with softer-than-expected inflation readings, may prompt policymakers to take a cautious approach and maintain a data-dependent but accommodative stance.

Across the Atlantic, attention will turn to the European Central Bank (ECB), which will announce its interest rate decision on Thursday. The central bank is widely expected to leave rates unchanged at 2.00%, which could lend further support to the Euro.