Prior to the ECB meeting, EUR/USD struggles to defend post-Fed gains below 1.0700

As traders await the outcome of the European Central Bank's (ECB) monetary policy meeting, the EUR/USD pair relaxes near the six-month high, falling to 1.0675 on Thursday morning. Nonetheless, the comment recently praised the Federal Reserve's (Fed) failure to convince US Dollar bulls while releasing aggressive information.

In announcing the 50-bps rate increase, the Fed met market expectations. The US central bank also changed the dot plot to indicate a terminal rate of 5.1%, up from 4.6% in the September Statement of Economic Projections (SEP). In addition, the Fed raised its inflation projections upward, while its growth projections for 2023 and 2024 were reduced.

Following the quantitative specifics, Fed Chairman Jerome Powell defended his hawkish reputation while saying that the eventual level of interest rates is more significant than the rate at which they increase. The official noted that the Federal Open Market Committee (FOMC) must maintain peak interest rates until policymakers are "very certain" that inflation would decline in a sustainable manner.

The market reaction appeared predominantly negative as US Treasury bond yields failed to respond to the Fed's aggressive stance and stocks recovered some of their initial losses. In addition, the US Dollar Index (DXY) remained under pressure near the multi-month low, after reaching a new low of approximately 103.40.

In the future, the EUR/USD may exhibit a sideways trend amidst the pre-ECB jitters and the policy hawks' approaching recession fears. In spite of this, the regional central bank is likely to announce a 50 basis point (bps) rate hike and may disclose details of its Quantitative Tightening (QT) program to favor pair buyers. Similarly, if President Christine Lagarde is able to appease the hawks by maintaining her aggressive views for higher interest rates, the pair may continue firmer.