EUR/USD remains capped below 1.0800, Fed rate decision eyed

• EUR/USD holds below 1.0800 on a modest US Dollar strength.
• US Consumer Price Index (CPI) report broadly matched market expectations.
• German ZEW Indicator of Economic Sentiment came in at 12.8 vs. 9.8 prior, above the market consensus of 8.8.
• The Fed interest rate decision and press conference will be closely monitored by traders.

The EUR/USD pair remains capped under the 1.0800 mark during the early Asian trading hours on Wednesday. The Federal Reserve (Fed) and the European Central Bank (ECB) will announce their decisions on monetary policy on Wednesday and Thursday, respectively. At press time, the major pair is trading at 1.0792, losing 0.04% on the day.

US inflation report broadly matched market expectations, with the headline Consumer Price Index (CPI) climbing 0.1% MoM in November from 0% in October while the annual headline CPI eased from 3.2% to 3.1% in November. Additionally, the Core CPI rose to 0.3% MoM from 0.1% in the previous month. On an annual basis, the Core CPI figure grew 4.0% YoY, as expected.

The ECB is expected to leave interest rates unchanged at its December meeting on Thursday, even though eurozone inflation is falling much closer to its 2.0% target. The ECB prepared to push back market expectations for a rate cut as early as March by stating that they still see price upside risks, notably from growing wages. Last month, ECB President Christine Lagarde said that she still wanted to see clear evidence that tight labor markets were not causing another inflationary spike.

On Tuesday, the German ZEW Indicator of Economic Sentiment came in at 12.8 versus 9.8 prior, above the market consensus of 8.8 whereas the Current Situation Index fell to -77.1 from the previous reading of -79.8, below the expectation of -75.5. Furthermore, the Eurozone ZEW Economic Sentiment Index rose to 23.0 from 13.8 in the previous reading, beating the estimation of 12.0.

The market anticipates the Fed to maintain the benchmark overnight borrowing rate in a range between 5.25% and 5.5% at its December meeting on Wednesday. Additionally, the market is pricing in aggressive rate cuts, with 80% odds of a rate cut in May and continuing to cut at least a full percentage point by the end of the year, according to the CME FedWatch Tool.

Moving on, the US Producer Price Index (PPI) will be released on Wednesday ahead of the Fed interest rate decision. After the monetary policy meeting, the Fed officials will update their forecast on economic growth, inflation, and the labor market. Traders will take cues from this event and find trading opportunities around the EUR/USD pair.