Euro weakens below 1.1200 as traders brace for Fed, ECB rate decisions

• EUR/USD softens to around 1.1170 in Tuesday’s early Asian session.
• Traders await the Fed, ECB policy meetings later this week for fresh impetus.
• Moody’s keeps France’s credit rating unchanged.

The EUR/USD pair extends the decline near 1.1170 during the early Asian trading hours on Tuesday, pressured by risk-off sentiment. Markets might turn cautious later in the day ahead of the US Federal Reserve (Fed) and European Central Bank (ECB) interest rate decisions later this week.

The Fed decided to raise the interest rates by 25 basis points (bps) to a range of 3.75% to 4% last month, its first hike since 2023. However, the US central bank is likely to leave interest rates unchanged at its upcoming October meeting on Wednesday.

Fed funds futures are now pricing in only a 10% probability the Fed will hike rates by another quarter point at its October policy meeting, according to the CME FedWatch tool. Nearly 75% anticipate at least one rate increase by year-end.

“Inflation is still the No. 1 problem in the U.S. economy, and there are a lot of signs it is getting more broad-based,” said Heather Long, chief economist at Navy Federal Credit Union. “For consumers, it means really high borrowing costs for the foreseeable future.”

However, “given that it’s right before an election,” Heather added, “they won’t hike in October.”

Moody’s Ratings kept France’s credit rating unchanged at Aa3 last week, despite a steady rise in its debts and the political fragmentation that has made it difficult to rein in borrowing, per the Wall Street Journal. This eased fears that France's fiscal troubles could trigger a broader repricing of Eurozone assets, which might cap the downside for the shared currency.

The ECB is set to leave its key interest rate unchanged Thursday amid waning economic momentum. Economists surveyed by Reuters expect a 25 bps hike at the December meeting. Traders will closely monitor comments from ECB Christine Lagarde for clues on the bank's road map going forward.

Euro remains under pressure as energy shock and France risks focus attention on ECB

Analysts at MUFG note that the Euro has only managed a “modest” recovery at the start of the new week after “falling to fresh year-to-date lows against the Pound and Yen,” leaving it “the worst performing G10 currency this month” as sentiment is undermined by “rising energy prices and heightened investor concerns over fiscal and political risks in France.” They highlight that “the price of natural gas in Europe has risen sharply this month by more than a third lifting it above EUR 90/MWh heading into the winter,” a move that is “reinforcing stagflation risks for the euro area economy.” While MUFG points out that “so far this year the euro area economy has proven more resilient than expected to the energy price shock,” they caution that “the release of the euro area PMI survey at the end of last week signalled that growth momentum may be about to soften.”

Against this backdrop, MUFG argues that “we don’t expect Moody’s decision to leave their rating on hold to bring much relief for French bonds or the euro, although it may prevent further selling at the start of this week ahead of the ECB’s upcoming policy meeting.” Looking ahead, they stress that “the ECB’s upcoming policy meeting has more potential to be a bigger market mover,” but add that “we believe it is too soon to expect the ECB to announce policy measures to support government bond markets.”

Warsh flags investment surge and AI risks as Fed keeps hawkish bias intact

Fed Chair Warsh’s speech scores 5.6/10 on the FXS Speechtracker, modestly softer relative to the historical average of 6.1/10, reflecting a cautious tone despite optimism on structural growth and an investment surge. The admission of being “over-scarred from the global financial crisis” underscores a persistent bias toward guarding against tail risks even as Warsh highlights policy-driven investment strength and refrains from pre-committing on the October and December meetings. Warsh’s focus on AI as a near-term demand shock with uncertain employment effects, and on financial stability spillovers, reinforces a risk-aware stance that tempers the otherwise upbeat narrative on the US economy and the Dollar.

The FXS Fed Sentiment Index was unchanged, moving 0.00 points to a still-elevated level of 127.51, signaling that the speech leaves the Fed’s hawkish policy bias broadly intact despite the slightly softer FXS Speechtracker score. With the FXS Fed Sentiment Index firmly above the neutral 100 mark, markets are likely to interpret Warsh’s remarks on price stability, investment surge, and AI-related risks as consistent with a Fed that remains inclined toward restrictive policy, supportive of the Dollar against the Euro and Yen.

Technical Analysis: EUR/USD keeps a bearish vibe below the 100-day SMA

In the daily chart, EUR/USD extends a bearish near-term bias as spot remains below the 100-day simple moving average (SMA) and under the Bollinger middle band. Price is holding just above the lower Bollinger band support, hinting at a short-term stabilization attempt, while the Relative Strength Index (RSI) at 34 keeps the pair close to bearish territory, suggesting downside pressure is still dominant despite the slight bounce from recent lows.

On the topside, initial resistance emerges at the Bollinger middle band around 1.1215, followed by the upper band at 1.1295, with the 100-day SMA at 1.1445 acting as a stronger structural cap should recovery attempts extend. On the downside, immediate support is provided by the lower Bollinger band at 1.1140; a decisive break below this zone would open the door for a continuation of the broader downtrend, while holding above it would keep the pair in a corrective consolidation beneath the clustered overhead resistance.

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