The outcome of the December 18 Federal Reserve meeting is widely anticipated to cause significant volatility. Compressed expectations will swiftly resolve, either in favor of EUR/USD bulls or bears.

The formal outcome of the meeting is predetermined. According to CME FedWatch, there is a 97% probability that 25 basis points will cut the interest rate. The market is nearly certain the Fed will engage in another round of monetary easing. This confidence has grown over the past three weeks, so the 25-basis point cut will not impress market participants. All attention will focus on the accompanying statement, updated dot plot, new macroeconomic forecasts, and Fed Chair Jerome Powell's rhetoric tone.

The main intrigue lies in how hawkish the rhetoric from the Fed members will be. That is, figuratively speaking, the market will assess the Fed's "degree of hawkishness," especially considering the latest inflation reports released last week.

The headline CPI accelerated to 2.7% YoY in November, marking the second consecutive month of increases. The core CPI remained steady at 3.3% for the third straight month. The headline PPI jumped to 3.0% YoY—the fastest pace since March 2023. The core PPI stayed at 3.4%, against expectations of a decline to 3.2%. It came out at the same level in October and before that - in April 2023.

These reports were released during the "quiet period" (the 10 days preceding the Fed meeting), so no Fed official has commented on them. However, earlier remarks by central bank officials suggest the Fed will adopt either a "moderately hawkish" or a "hawkish" stance in December. We are talking about the tone of the rhetoric of the final communique and the statements of the Fed head.

A "moderately hawkish" scenario implies restrained rhetoric, signaling a slower pace of rate cuts in 2025. For instance, a Fed Board member, Christopher Waller, stated in late November that he would support a pause in the easing cycle if economic data showed inflation was not declining as expected.

After the release of November Nonfarm Payrolls and the core PCE index (for October), multiple Fed officials toughened their rhetoric. This includes Jerome Powell, Christopher Waller, Lisa Cook, Michelle Bowman, and Austan Goolsbee, all hinting at a slower pace of rate cuts.

It's important to recall that the wage growth component of November's Nonfarm Payrolls report also exceeded expectations. Average hourly earnings rose 4.0% YoY (forecast: 3.9%). On a monthly basis, the indicator climbed 0.4% (forecast: 0.3%). The core PCE index for October accelerated to 2.8% YoY after two months at 2.7%.

This data strengthens the case for a "moderately hawkish" outcome at the Fed meeting—meaning a 25-basis point rate cut coupled with tighter rhetoric. The Fed will likely hint (via the dot plot) at a slower pace of monetary easing in 2025. Such an outcome will provide background support to the US dollar but not surprise the market. For instance, the probability of a pause at the January meeting currently stands at 81% (CME FedWatch). If the Fed hints at this, the reaction will likely be muted. For EUR/USD, this scenario would mean testing 1.0440 (the lower line of the Bollinger Bands on the daily chart) but moving into the 1.03 range seems unlikely.

However, a "hawkish" scenario would see EUR/USD fall below 1.0400, potentially updating its yearly low at 1.0334. This scenario would involve significantly tighter rhetoric in the statement and Powell's comments—potentially even hinting at the possibility of rate hikes in 2025.

For context, Mary Daly, head of the San Francisco Fed, had previously stated that monetary policy could be tightened further if inflation showed sustained acceleration. Given that both CPI and PPI reports indicated such trends, the possibility of similar rhetoric at the December meeting cannot be ruled out. In this case, we would see a USD rally, including a sharp decline in EUR/USD. While a hawkish outcome is less likely, it cannot be excluded—especially considering the inflation reports were released during the quiet period.

In conclusion, the results of the December Fed meeting are likely to be somewhat hawkish. A renewed downtrend in EUR/USD will depend on whether the Fed delivers a "hawkish surprise"—if it signals potential monetary tightening in 2025. If Fed members merely reiterate previous comments about slowing the pace of easing, EUR/USD bears will struggle to maintain a sustained downtrend. In that case, buyers will likely regain control, pushing the pair toward the 1.06 area.

Opening trades on EUR/USD now is extremely risky: the Fed could either strengthen the dollar or undermine it if it fails to meet the market's high expectations. And, in my view, those expectations are overly ambitious.