Euro declines as US Dollar recovers recent losses amid hawkish Fed tone
- EUR/USD faces pressure as the US Dollar gains support from persistent hawkish sentiment around Federal Reserve policy.
- Investor mood improved on Middle East diplomatic breakthrough hopes as Iranian President Pezeshkian attends UNGA alongside Trump's meeting openness.
- Euro faces pressure after Germany's far-right AfD state election victory leaves Chancellor Friedrich Merz's leadership increasingly vulnerable.
EUR/USD remains subdued for the second successive day, trading around 1.1460 during the European hours on Tuesday. The pair faces challenges as the US Dollar (USD) recovers its daily losses amid prevailing hawkish sentiment surrounding the Federal Reserve (Fed) policy stance.
Fed’s Musalem leans more hawkish as inflation risks call for earlier, incremental hikes
Fed’s Musalem delivered a distinctly hawkish message, with an FXS Speechtracker score of 8/10, above the 7.4/10 historical average and signaling stronger-than-usual policy tightening bias relative to the established baseline. Musalem warned that without further policy restraint, inflation is likely to remain substantially above the 2% target over the next 18 months, arguing that interest rates need to rise further to tackle demand- and supply-driven price pressures, even as the labor market sits near full employment and business contacts plan price increases closer to 3%. The emphasis on commodity shocks beyond oil, including base metals like copper, and a preference for “earlier and incremental” hikes rather than “later and larger” moves reinforces a front-loaded tightening narrative that is supportive for the Dollar and negative for risk-sensitive currencies.
The FXS Fed Sentiment Index rose by 0.42 points to 149.96, firmly in hawkish territory and consistent with the above-baseline tone captured by the FXS Speechtracker. This elevated level well above 100 underscores that the broader Fed communication backdrop remains skewed toward further tightening, a configuration that typically underpins the Dollar while weighing on the Euro, Yen and other major peers.
Dollar index extends post-Fed gains toward key resistance
Analysts at MUFG/BTMU note that it has been “a quiet start to the week in the FX market,” with the Dollar continuing to trade on a stronger footing following the Fed’s decision last week to begin tightening monetary policy. They highlight that this has “helped to lift the dollar index back above the 100.00-level for the first time since the start of August,” and point to the next important resistance level, which is “provided by the year-date-high from 24th June at 101.80.”
However, the Greenback may face challenges amid increased risk-on sentiment due to trade and diplomatic prospects: traders are closely monitoring an upcoming US-China summit for signs of improving relations between the world’s two largest economies.
Hopes for a diplomatic breakthrough in the Middle East have improved investor mood following news that Iranian President Masoud Pezeshkian will lead a delegation at the UN General Assembly, alongside comments from US President Donald Trump indicating he would likely be open to a side meeting.
Moreover, the Euro (EUR) struggles due to intensifying political instability in Germany. Following Sunday's state elections in northeastern Germany, the far-right Alternative for Germany (AfD) claimed first place, while Chancellor Friedrich Merz's conservative party suffered its worst regional defeat in post-war history, leaving his position increasingly precarious.
Technical Analysis:
In the daily chart, EUR/USD trades at 1.1460, extending its retreat beneath both the short-term and medium-term Exponential Moving Averages (EMAs), which keeps the near-term bias bearish. The nine-period EMA at 1.1509 and the 50-period EMA at 1.1548 both sit overhead and hint at a capped tone while price remains below them. Meanwhile, the 14-day Relative Strength Index (RSI) has slipped toward the low-30s, suggesting emerging oversold conditions that could slow the downside rather than trigger an immediate reversal.
(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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