EUR/USD remains under pressure below 1.0850, German GDP data eyed

• EUR/USD loses ground near 1.0847 on the firmer USD. 
• ECB’s Knot said the central bank needs to see proof of slowing wage growth in the eurozone before cutting the interest rates. 
• The markets expected the FOMC to hold the rate unchanged at 5.25%–5.50% at its January meeting on Wednesday.

The EUR/USD pair trades weaker during the Asian trading hours on Monday. The downtick of the major pair is supported by renewed US Dollar (USD) demand amid rising geopolitical tension in the Middle East. Investors will focus on the Federal Open Market Committee (FOMC) meeting on Wednesday. EUR/USD currently trades around 1.0847, losing 0.07% on the day. 

Last week, the European Central Bank (ECB) decided to leave key interest rates unchanged as underlying inflation declined in December last year. ECB President Christine Lagarde warned that the Eurozone most likely experienced stagflation in the last quarter of 2023 and outlined the risks of further economic slowdown. Lagarde further stated that the ECB remains committed to a data-dependent approach and will make decisions on a meeting-by-meeting basis.

Furthermore, ECB governing council member Klaas Knot said on Sunday that the central bank needs to see proof of slowing wage growth in the eurozone before cutting interest rates. However, the markets have increased bets on rate cuts, with expectations of a 50 basis point (bps) reduction by June and a 140 bps cut by December 2024. This, in turn, might exert some selling on the Euro (EUR) and act as a headwind for the EUR/USD pair.

The Federal Open Market Committee (FOMC) maintained the interest rate steady during its last meeting in December 2024 and traders expected the FOMC to hold the rate unchanged at 5.25%–5.50% at its January meeting on Wednesday. Traders were assigning about 48.2% odds of the first-rate cut from the Fed in March, down from 88% a month ago.

The German Gross Domestic Product (GDP) for the fourth quarter will be due on Tuesday, which is forecast to contract by 0.3% QoQ and 0.2% YoY. The FOMC meeting will take place from Tuesday to Wednesday, with no change in rate expected. The press conference will be closely watched by traders. If Fed Chairman Jerome Powell delivers dovish comments, the USD will likely weaken against its rivals.