Euro weakens below 1.1400 as Fed rate hike expectations reinforce US Dollar strength

• EUR/USD softens to around 1.1380 in Thursday’s early Asian session. 

• The prospect of the US interest rate hikes supports the US Dollar. 

• ECB’s Makhlouf said central bank will have to act again if second-round inflation effects appear. 

The EUR/USD pair loses ground to near 1.1380 during the early Asian trading hours on Thursday. The major pair extends its downside as hawkish signals from the US Federal Reserve (Fed) boost the US Dollar (USD) against the Euro (EUR). Traders will keep an eye on the US weekly Initial Jobless Claims report and the Fedspeak later in the day. 

According to the preliminary reading of the US S&P Global Purchasing Managers Index (PMI), the Manufacturing PMI rose to 52.0 in September from 51.7 in August. This figure came in stronger than the expectations of 51.4. 

Meanwhile, the Services PMI eased to 51.7 in September, versus 52.5 prior, below the market consensus of 52.0. The Composite PMI declines to 51.7 in September, compared to 52.5 in the previous session. 

On Wednesday, Federal Reserve (Fed) Governor Michael Barr said that “further policy adjustments are likely to be needed” to get inflation under control. Fed President Tom Barkin and Boston Fed President Susan Collins both backed the recent interest rate increase, citing continued inflationary pressures. Hawkish remarks from Fed officials could lift the Greenback and act as a headwind for EUR/USD in the near term. 

Markets are now pricing in nearly a 69.7% chance that the Fed would hike rates by a quarter percentage point in October, up from 48.7% one week ago, according to the CME FedWatch tool. 

The European Central Bank (ECB) policymaker Gabriel Makhlouf said the central bank may raise interest rates again if high energy prices begin to spread to prices in other sectors, but so far there is no sign of such second-round inflation effects. 

Markets are currently pricing roughly a 45% chance of another 25 bps rate hike in October, with a further rate hike fully priced only by December at the earliest, according to Reuters. That leaves plenty of room for incoming data to move expectations.

Societe Generale sticks to long-term Dollar strength despite muted volatility

Strategists at Societe Generale reiterate that their “King Dollar Will Return” framework remains intact, stressing that “the underlying theme of that outlook was that, in a contest between strong dollar fundamentals and the US preference for a weaker currency, fundamentals would eventually prevail.” They acknowledge that market conditions have shifted, conceding that “maybe that is still true, although for now volatility appears to be the loser.” Even so, Societe Generale is clear that “this does not alter the shift in our long-term view,” with the bank continuing to expect Dollar fundamentals to reassert themselves over time.

Fed’s Barr flags more hikes as inflation risks rise, supporting Dollar upside

Fed’s Barr delivered a distinctly hawkish message, with an 8/10 FXS Speechtracker score standing above the 7/10 historical average and signaling a stronger tightening bias relative to the established baseline. The emphasis that “further rate hikes [are] likely needed” and that risks to achieving 2% inflation have increased, while labor market risks have receded, underscores a willingness to lean into additional policy tightening amid strong growth and a solid labor market, a mix typically supportive for the Dollar. The admission that the Fed was “out of position” and needed to recalibrate policy in the “right direction” reinforces the notion that the current stance may still be too loose for a timely return to target, adding to the hawkish tone.

The FXS Fed Sentiment Index rose by 0.42 points to 148.81, firmly in hawkish territory and consistent with the above-baseline FXS Speechtracker score. An index level this far above 100 signals that the broader Fed communication backdrop remains decisively skewed toward further tightening, a configuration that should continue to underpin Dollar yields and, by extension, Dollar demand in FX markets.

Technical Analysis: EUR/USD retains a negative outlook amid oversold RSI

In the daily chart, EUR/USD extends its slide beneath all key moving average and volatility bands, which keeps the near-term bias firmly bearish. Price is holding under the 100-day moving average (MA) and the Bollinger Bands’ middle simple moving average, while the entire Bollinger envelope now sits above spot, underscoring persistent downside pressure. The Relative Strength Index (14) at 25.4 is in oversold territory, which hints at stretched bearish momentum but has yet to trigger a meaningful recovery.

On the topside, immediate resistance emerges around the lower Bollinger Band at 1.1380, a nearby volatility threshold that the pair would need to reclaim to ease the current pressure. Above that, a more consequential resistance cluster is formed by the 100-day MA at 1.1535 and the Bollinger middle band at 1.1545, with the upper Bollinger Band higher up near 1.1710 marking the next bullish objective if a stronger corrective bounce develops. With no clear underlying support levels below the current price in this dataset, the pair remains vulnerable to further declines until buyers can regain at least the 1.1380–1.1550 area.

(The technical analysis of this story was written with the help of an AI tool. Know more.)