Euro slips below 1.1400 as Fed decision looms with 89% cut odds

The euro slipped below $1.1400 against the dollar on Tuesday, as traders positioned for a Federal Reserve interest-rate decision in September that derivatives markets price as a near-certainty for a quarter-point cut.

"The risk-reward heading into US CPI this week is for a modest USD bounce," TD Securities strategists wrote in a research note, warning that an upside surprise in inflation could challenge expectations for an almost fully priced-in rate cut. They added that a downside miss would likely have less impact on the dollar, with a larger 50-basis-point cut more likely to be triggered by further labor market deterioration than by soft CPI figures alone.

The dollar index held at 98.497 after gaining 0.5% over the prior two sessions, recovering from earlier losses tied to President Donald Trump's dovish-leaning picks for Fed leadership. Against the yen, the greenback edged 0.1% higher to 148.28. The 1.1400 level represents a psychological floor for the euro that traders are watching closely ahead of the September 17 decision.

The stakes are high. A hawkish surprise — either a hold or guidance that points to fewer future cuts — would likely strengthen the dollar and push EUR/USD decisively below 1.1400. A dovish outcome, by contrast, could allow the euro to reclaim that level and test resistance near 1.1700. The decision also carries ripple effects across asset classes, with gold falling 1.3% to $4,024.90 per ounce on Tuesday as the dollar steadied and West Texas Intermediate crude dropping 4.1% to $79.26 per barrel.

Rate expectations hinge on CPI data

The Fed's path depends heavily on inflation data due later this week. Economists polled by Reuters expect core US consumer price inflation to have risen 0.3% in July, pushing the annual rate to 3%. An upside surprise could challenge the near-fully priced-in cut expectations, while a downside miss would likely reinforce them.

Market pricing reflects about an 89% probability of a quarter-point reduction on September 17, according to Reuters data. Cooling inflation could strengthen the case for a cut, but any signs that Trump's tariffs are fueling price pressures may keep the Fed on hold. The last time the Fed faced this level of market conviction heading into a decision was in September 2024, when a 25-basis-point cut was fully priced in and delivered as expected — triggering a dollar selloff that pushed EUR/USD above 1.1500 within two weeks.

Cross-asset transmission

The Fed's decision also reverberates across other currency pairs. The Australian dollar traded at $0.6518, little changed, as traders awaited the Reserve Bank of Australia's policy decision. Economists widely expect a quarter-point cut following weaker-than-expected second-quarter inflation data and a rise in unemployment to a three-and-a-half-year high. However, last month's surprise hold by the RBA has left traders cautious, with a recent shift in the central bank's decision-making process adding uncertainty to the outcome.

In commodity markets, the moves show how central bank policy expectations drive asset allocation across currencies, rates, and commodities. Gold fell to a one-week low even as the dollar index slipped slightly, while investors awaited the Fed's decision and comments from Chair Kevin Warsh on the policy outlook.

The broader implications extend beyond the immediate rate decision. If the Fed delivers the expected cut but points to a slower easing cycle ahead, the dollar could strengthen on a relative yield basis against currencies whose central banks are cutting more aggressively. If it cuts and points to further easing, the dollar could weaken broadly, providing a tailwind for the euro and other risk-sensitive currencies.

This article is for informational purposes only and does not constitute investment advice.