EUR/USD finds support near 1.0650, downside remains favored ahead of Fed policy

• EUR/USD finds a temporary support near 1.0650 though dismal market sentiment keeps the downside bias intact.
• Uncertainty ahead of the Fed’s policy has dampened the appeal of risk-sensitive assets.
• The ECB is widely anticipated to begin reducing interest rates from June.

The EUR/USD pair finds a provisional support near 1.0650 in Wednesday’s European session. The near-term outlook for the major currency pair remains bearish as investors are cautious ahead of the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT.

Investors see the Fed keeping interest rates steady in the range of 5.25%-5.50% as inflationary pressures are significantly higher than the desired rate of 2%. Therefore, rate cuts at this stage could revamp price pressures again.

The Fed is expected to endorse a restrictive interest rate policy for longer due to a slew of hotter-than-expected inflation readings in the January-March period. The Q1 Employment Cost Index released on Tuesday was also stronger than consensus, deepened fears of inflation remaining persistent ahead. The index rose strongly by 1.2% in comparison with the estimates of 1.0% and the prior reading of 0.9%.

Meanwhile, the market sentiment is extremely cautious ahead of Fed’s policy meeting. S&P 500 futures have posted significant losses in the London session, exhibiting a sharp decline in the risk-appetite of the market participants. 10-year US Treasury yields rise to 4.69% on expectations of a hawkish guidance from the Fed. The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies rose to 106.35.

On the Eurozone front, the long-term outlook of the Euro is vulnerable as investors see the European Central Bank (ECB) starting to reduce interest rates from the June meeting. On Tuesday, ECB policymaker Pablo Hernandez de Cos supported for ECB pivoting to interest rate cuts from June if inflation continues to decline gradually. ECB Cos advised that the central bank should not commit a specific rate path and should use a data-dependent approach.