The EUR/USD pair started the week in a tight range, trading between 1.1720 and 1.1725 during the Asian session on Monday. While momentum is muted, downside pressure on the euro appears limited thanks to contrasting monetary policy outlooks between the European Central Bank (ECB) and the U.S. Federal Reserve.

The ECB, as expected, left interest rates unchanged last Thursday while maintaining a constructive outlook on both growth and inflation. Policymakers emphasized a meeting-by-meeting, data-driven approach without locking into a fixed policy path. This guidance has cooled expectations for any near-term rate cuts, helping to support the single currency.

Policy Divergence Favors the Euro

Traders have now scaled back the likelihood of another ECB rate cut before spring to roughly 40%. This creates a relative advantage for the euro against the U.S. dollar, given that the Fed is widely expected to ease policy as soon as this week.

According to the CME FedWatch Tool, markets assign more than a 90% probability of a 25-basis-point rate cut on Wednesday, with a slim chance of a larger 50-basis-point move. These expectations have kept dollar bulls cautious and provided a modest tailwind for EUR/USD.

Markets Eye Fed Guidance for Direction

Despite the euro’s policy advantage, investors appear hesitant to build aggressive positions ahead of the Fed’s two-day policy meeting. Traders will be watching closely not only for the immediate rate decision but also for any signals about the pace of cuts in the months ahead.

For now, the pair remains confined to a narrow band, with market participants preferring to wait for clearer signals before committing to fresh bets. Still, the broader backdrop suggests that dips in EUR/USD could attract buying interest, especially if the Fed confirms a more dovish path.