Euro edges higher above 1.1450 despite Fed hawkish stance
- EUR/USD gains ground to around 1.1485 in Monday’s early Asian session.
- The Fed's recent rate hike could underpin the US Dollar and cap the pair's upside.
- ECB's Vujcic said energy is driving rate expectations, but the central bank will look at a broader set of indicators.
The EUR/USD pair posts modest gains near 1.1485 during the early Asian session on Monday. However, the potential upside for the major pair might be limited amid the US Federal Reserve’s (Fed) hawkish hike and ongoing Middle East tensions. European Central Bank (ECB) President Christine Lagarde is set to speak later on Monday.
The Fed raised the interest rates by a quarter-percentage point at its September meeting last week and signaled more hikes in the coming months. New Fed Chair Kevin Warsh joined a unanimous decision to lift interest rates, while officials validated a hawkish path and projected one more increase later this year. Hawkish tone from the Fed could lift the USD and act as a headwind for the major pair.
Iran’s military issued a new retaliation threat against US military bases in the Middle East as US President Donald Trump warned about the possibility of fresh US strikes, per NBC News. Signs of a prolonged conflict in the Middle East could boost safe-haven flows, supporting the Greenback in the near term.
ECB Vice President Boris Vujcic said that market bets on further rate hikes are being driven largely by higher energy prices, but policymakers will look at a much wider set of economic indicators when deciding their next moves.
Money markets price in another three or four rate increases by the end of next year, with the next one possibly coming as soon as October, according to Reuters. That would raise the deposit rate to 3.25% or 3.50%.
Euro steadies as ECB hawkishness offsets limited data flow
Strategists at Scotiabank observe that the “outlook for relative central bank policy looks to be stabilizing” as markets reassess the near-term risk of further tightening from the ECB. They note that policymakers remain “overwhelmingly hawkish,” explicitly linking their stance to “both energy-related inflation concerns as well as growth.” On the data front, Scotiabank highlights that “fundamental releases have been limited to stronger than expected German PPI,” reinforcing the case for caution among ECB officials even as policy expectations between the ECB and the Fed settle into a more balanced configuration.
Kashkari flags persistent inflation but leans on resilient growth narrative
The Fed's Kashkari delivered a slightly softer tone, with a 6.2/10 FXS Speechtracker score essentially in line with the 6.3/10 historical average, signaling only a marginal tonal shift. Emphasis that inflation remains too high and extends beyond oil prices keeps a hawkish bias intact, but the focus on robust growth, resilient American economy, and improving productivity introduces a cautiously optimistic narrative that inflation can be reduced without derailing expansion. The remark that the bond market is the responsibility of the Treasury underscores a clear division of roles, keeping the Fed’s focus squarely on inflation and the labor market, which is still described as robust.
The FXS Fed Sentiment Index fell by 1.47 points to 150.61, indicating a modest pullback in perceived hawkishness relative to recent communications. However, with the index still well above the neutral 100 mark, the Fed remains firmly in hawkish territory, suggesting that despite the softer shift captured by the FXS Speechtracker, markets should still expect a policy stance biased toward containing inflation rather than easing prematurely.
Technical Analysis: EUR/USD
In the daily chart, EUR/USD keeps a bearish near-term tone as spot holds below the 100-day Simple Moving Average (SMA) and the Bollinger midpoint. The pair is hovering just above the lower Bollinger band support, while the Relative Strength Index (RSI) at 36.4 sits close to oversold territory, suggesting downside pressure persists but with scope for a corrective pause.
On the downside, the immediate support is the lower Bollinger band at 1.1460; a sustained break below this level would open the door toward fresh lows and deepen the bearish bias. On the topside, initial resistance stands at the 100-day SMA around 1.1545, followed by the Bollinger middle band near 1.1585, with a more distant cap at the upper band around 1.1710, levels that would need to be reclaimed to ease the current downside pressure.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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