Euro strengthens above 1.1550 on fading Fed hike bets
- EUR/USD posts modest gains around 1.1580 in Wednesday’s early Asian session.
- Reduced Fed rate hike expectations undermine the US Dollar.
- ECB’s Lane said Eurozone inflation at 3% remains too high.
The EUR/USD pair trades with mild gains near 1.1580 during the early Asian session on Wednesday. The US Dollar (USD) softens against the Euro (EUR) as softer US inflation data dialed back expectations of tighter Federal Reserve (Fed) policy. Traders will take more cues from the European Central Bank (ECB) President Christine Lagarde’s speech later on Wednesday.
The Fed is likely to keep its key interest rate unchanged in the upcoming September policy meeting and through year-end, according to most economists in a Reuters poll.
Market pricing for a September quarter-point hike flipped toward near a 65% odds of a Fed hold after the release of unexpected job losses in July, softer consumer price inflation and weaker Retail Sales.
Nonetheless, the US-Iran conflict has entered its sixth month, with US President Donald Trump saying that he is not interested in renewing the expiring peace deal with Iran. On Tuesday, Trump stated that “no talks or conversations are going on, or scheduled, with the Islamic Republic of Iran," adding that the naval blockade remains in full force and effect.
Signs of a prolonged conflict in the Middle East could boost a safe-haven currency such as the Greenback and act as a headwind for the major pair.
Across the pond, financial markets are now pricing in a continuation of the ECB hiking cycle. The ECB Watch Tool indicates a 90% to 94% chance of a 25 basis points (bps) hike to 2.50% at the next policy meeting scheduled for September 9.
ECB chief economist Philip Lane said Tuesday that Eurozone inflation at 3% remains too high despite appearing modest compared to previous levels.
Euro holds firm as Germany ZEW expectations beat forecasts
Strategists at Scotiabank note that the Euro remains “resilient, but little changed on the session,” with support from improving survey data out of Germany. They highlight that Germany’s August ZEW survey “reflected better-than-expected sentiment,” as the Expectations component “rising to 34, above the consensus forecast of 30 and above July’s 26.3” underscores a more constructive outlook among analysts despite the still-gradual recovery backdrop.
Lane’s cautious optimism keeps Euro bulls in check
The FXS Speechtracker score of 5.4/10, below Lane’s historic 6.4/10 average, points to a softer tone despite comments that the European economy continues to grow and that inflation will be guided back to target within the next year or so. Emphasis on meeting-by-meeting, data-dependent decisions and a “more reactive” role suggests a mildly dovish shift, limiting immediate upside for the Euro as markets see less urgency for aggressive tightening.
Lane’s remark that the US is not a dominant factor in global trade reinforces a Euro-centric policy focus, but does not materially strengthen hawkish expectations. Overall, the combination of growth reassurance with reactive policy guidance supports a narrative of gradual normalization rather than renewed tightening, keeping Euro traders cautious about pricing in stronger policy support.
Technical Analysis: EUR/USD keeps a positive tone above the 100-day SMA
In the daily chart, EUR/USD holds a constructive near-term bias as it trades above the 100-day simple moving average (SMA) and the Bollinger middle band, suggesting underlying demand on dips. Price is advancing towards the upper Bollinger band, while the Relative Strength Index (14) around 63 maintains a bullish momentum tone without yet reaching overbought territory.
On the topside, initial resistance is located at the upper Bollinger band near 1.1650, where recent gains could face profit-taking. On the downside, immediate support aligns with the 100-day SMA at 1.1570, followed by the Bollinger middle band around 1.1505, with the lower Bollinger band near 1.1365 marking a more distant structural floor in the event of a deeper pullback.
(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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