EURUSD Battles Risk Aversion Ahead of Fed Decision

EURUSD Attempts Recovery After Tuesday Slide

The EURUSD pair is trying to claw back lost ground on Wednesday after a steep drop the previous day, but the broader landscape remains treacherous for the common currency. Persistent geopolitical tensions, surging crude oil prices, and looming Federal Reserve policy signals have all coalesced to curb investor appetite for the Euro, which remains under pressure around the psychologically key 1.1500 level nearly 1% below its peak from last week.

While the pair is showing some modest signs of stabilization, the recovery appears fragile. Traders remain cautious ahead of Wednesday’s key event: the Federal Open Market Committee (FOMC) meeting, which expected to provide pivotal clues about the US central bank’s rate outlook.

Middle East Escalation Weighs on Market Sentiment

Markets remain on edge as the conflict between Israel and Iran enters its sixth straight day, raising fears of a broader regional war. The latest rhetoric from Washington has done little to calm investor nerves. US President Donald Trump has demanded Iran’s “unconditional surrender” and has threatened military escalation, stating intentions to deploy more US fighter jets to support Israel.

Investors are deeply concerned about the potential ramifications of a full-scale Middle East conflict. The region is a critical chokepoint for global energy flows, and any disruption could reverberate across global markets—especially for Europe, which relies heavily on imported oil. As a result, safe-haven flows have bolstered the US Dollar at the expense of the Euro, reinforcing risk-off sentiment that has dominated currency markets all week.

Crude Oil Prices Spike, Adding Pressure on Eurozone Outlook

Brent Crude prices surged over $3 on Wednesday, climbing toward the $75 per barrel mark—a 16% increase from May. This rally in energy prices is further complicating the Eurozone’s economic outlook.

The Eurozone is a net importer of crude oil, and higher energy costs act as a tax on consumers and businesses alike. Rising input costs can erode profit margins, suppress consumer spending, and weigh on industrial output. With Germany—the bloc’s largest economy—already flirting with stagnation, elevated oil prices pose an additional drag on growth prospects.

This macro headwind has amplified downside risks for the Euro, even as some regional data points, like the latest ZEW Economic Sentiment Index, offered a glimmer of hope.

Eurozone Data Shows Resilience But Fails to Impress Markets

The German ZEW Economic Sentiment Index—a key forward-looking indicator—surged to 47.5 in June, sharply up from 25.2 in May and beating forecasts of 35.0. While the improvement suggests rising optimism among financial analysts about Germany’s future economic conditions, it failed to materially lift the Euro.

This muted response reflects the overwhelming dominance of geopolitical and monetary policy factors in current market dynamics. Traders laser-focus on US developments, particularly the Fed’s next moves, which expected to determine the near-term trajectory for EURUSD more than regional data surprises.

Fed in Focus: Will Powell Pivot?

The main event of the day is the FOMC’s monetary policy decision. The Fed is widely expected to leave interest rates unchanged in the 4.25%-4.50% range, but the tone of the accompanying statement and Chair Powell’s press conference will be crucial for the Dollar—and, by extension, the EUR/USD exchange rate.

Markets are currently pricing in a 60% probability of a rate cut in September, according to the CME FedWatch Tool. The latest batch of weak US economic data—particularly May’s Retail Sales, which fell 0.9% (worse than the -0.7% forecast)—has increased expectations that the Fed will soon pivot toward monetary easing.

Also of interest will be the Fed’s updated “dot plot,” which maps policymakers’ rate expectations over the coming months and years. Any indication that Fed officials are leaning toward two cuts this year, or more aggressive easing in 2026, would likely push the Dollar lower and support EURUSD.

However, should Powell maintain a hawkish stance or emphasize inflation concerns—particularly with oil prices climbing—the Greenback could regain momentum, driving the Euro back below the 1.1450 threshold.

Risk-Off Sentiment Continues to Favor USD

Despite the weak US data, the Dollar has held up relatively well thanks to its safe-haven appeal. Investors are prioritizing capital preservation over yield amid geopolitical chaos and global uncertainty.

The Euro, in contrast, is struggling to attract flows due to the region’s energy vulnerability and its economic fragility. The divergence in sentiment has made it difficult for EURUSD to sustain any rebound—even in the face of favorable data out of the Eurozone.

Unless we see a decisive shift in risk sentiment or Fed policy, EURUSD will likely continue to trade with a bearish bias, pressured by external risks and USD resilience.

Technical Analysis: EURUSD Battles to Hold Above 1.1500

From a technical standpoint, EURUSD is consolidating in a narrow band just above the 1.1450–1.1500 support zone. A daily close below 1.1450 would open the door to a deeper retracement toward the 1.1400 area, followed by the 1.1350 support zone.

On the upside, a break above 1.1530 would be needed to revive bullish interest and potentially spark a move toward 1.1600, last seen earlier this month.

Momentum indicators remain neutral-to-bearish, reflecting indecision as traders await fresh catalysts. The next directional move will likely be driven by how the market interprets the Fed’s tone later today.

EURUSD Currency Heat Map Snapshot

The Euro gaining ground on several G10 peers, but still lags behind commodity-linked currencies and shows vulnerability to risk-off flows.