EUR/USD edged down after two sessions of gains, trading near 1.1530 in Asian hours on Wednesday. Movement was limited as the US Dollar held steady ahead of the Federal Reserve decision later today. Markets expect the Fed to keep rates unchanged at 3.50%–3.75% for March, based on the CME FedWatch Tool. A hold would be the second consecutive pause.

Focus On Powell Comments

Attention is on comments from Chair Jerome Powell about how higher oil prices may affect policy. Oil has risen amid Middle East tensions and resistance from US allies to President Donald Trump’s request on securing shipping through the Strait of Hormuz. The US military said it struck Iranian coastal sites near the Strait of Hormuz over threats from Iranian anti-ship missiles, Reuters reported. The BBC reported Israel said it killed senior Iranian figures, including Ali Larijani and Gholamreza Soleimani, in airstrikes. Higher energy prices are adding to inflation pressures and complicating the European Central Bank outlook. The ECB decides on Thursday and is expected to leave the Rate On Deposit Facility at 2.0% in March. Before the latest tensions, markets expected the ECB to stay on hold through 2026. Traders now price in a possible hike as early as July, and Peter Kazimir said rates could rise sooner than previously expected.

Volatility And Policy Divergence

We are now seeing the EUR/USD pair hovering around 1.0850, which is a stark contrast to the 1.1530 level we saw around this time in 2025. With both the Federal Reserve and the European Central Bank set to announce policy this week, implied volatility is picking up. Traders should be prepared for a significant move as central bank guidance diverges. Looking back to March 2025, the Fed was holding rates in the 3.50%–3.75% range, but today they sit much higher at 4.25%-4.50%. With recent US inflation data from February 2026 showing a persistent headline CPI of 3.2%, the market is now less certain about the timing of the Fed’s first rate cut this year. This uncertainty suggests that options strategies, like buying a straddle on the EUR/USD, could be useful to profit from a large price swing in either direction following the Fed’s announcement. The situation is also different at the ECB, which held its deposit facility rate at 2.0% in March 2025. Today that rate is 3.75%, and with the latest Eurozone inflation figures at 2.6%, the ECB is also in a cautious position. The rate differential between the Fed and ECB remains a primary driver, and any surprise hawkishness or dovishness from either side will move the market. We saw how geopolitical flare-ups in the Middle East during 2025 impacted oil prices and complicated monetary policy. Those tensions remain a factor today, with Brent crude oil currently trading above $85 a barrel. This persistent inflationary pressure from energy prices supports the case for buying volatility, as it creates a “wild card” that central bankers must address in their forward guidance. Therefore, we should consider that the calm before these meetings may not last. Rather than taking a direct bet on the direction of EUR/USD, it seems more prudent to position for a breakout. The key is to watch how Jerome Powell and Christine Lagarde frame the impact of stubborn inflation and energy costs on their future rate paths. Create your live VT Markets account and start trading now.

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