Fed Rate Decision
Euro Holds Near One-Month Low As Markets Await Federal Reserve Decision
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Key Points
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Markets assign nearly a 79% probability that the Federal Reserve will deliver at least two rate increases by the end of the year, suggesting investors expect more than the already priced-in 25-basis-point move.
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ECB expectations have moved substantially higher: markets price the deposit rate at about 2.9% by December, compared with the current 2.5%, and 3.4% by November 2027, implying roughly a 50% chance of a fourth hike beyond the three already priced in.
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Rabobank said markets expect “much more than a one-and-done hike,” with euro money markets pricing more than four additional ECB rate increases beyond the two already delivered.
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EUR/USD’s relative-strength index is around 40, indicating persistent selling pressure but not an oversold condition; a sustained break above the 20-period EMA at 1.1589 would be needed to signal a more meaningful rebound.
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Oil-supply risks extend beyond the inventory data: Saudi Arabia reportedly canceled several September crude deliveries to European buyers after drone strikes forced the emergency shutdown of its East-West pipeline, while renewed Houthi attacks have left the pipeline’s reopening timeline uncertain.
The euro slumped to a one-month low near 1.1535 as traders braced for the Federal Reserve's interest rate decision on September 16. FXStreet reported that EUR/USD fell 0.68% over five consecutive sessions, closing at 1.1464. Markets are pricing a 92% chance the Fed will raise rates by 25 basis points to 3.75%–4.00%, with Chair Kevin Warsh's guidance on future hikes expected to drive currency moves.
The dollar's strength reflects persistent U.S. inflation, robust retail sales, and solid payroll data, while energy price pressures and Middle East conflict have heightened risk aversion. ActionForex noted the euro is trading near a seven-week low as the U.S. dollar remains supported by Fed tightening signals. The euro has gained some backing from expectations of further European Central Bank hikes, but technical indicators remain bearish, with ING analysts seeing more balanced risk-reward only if the pair breaks below 1.1500.
Fed Decision Overshadows Currency Trade
The Federal Reserve's policy announcement will be the main catalyst for EUR/USD movement this week. According to CME FedWatch data, markets assign a 92% probability to a 25-basis-point hike, raising the federal funds target to 3.75%–4.00%. Monex USA cautioned that Chair Warsh is known to avoid explicit forward guidance, so his tone on inflation will likely spark volatility rather than a clear policy roadmap.
Beyond the immediate 25-basis-point move, investors are pricing in more hikes ahead. FXStreet reports that markets see a 79% chance of at least two additional rate increases by year-end. This aggressive pricing has pushed the 10-year U.S. Treasury yield to 5.0%—its highest level since April 2007—and widened the yield gap between U.S. and eurozone bonds, pressuring the euro lower.
ECB Rate Hikes Offer Minimal Euro Support
The European Central Bank delivered a 25-basis-point hike last week, but market pricing for future ECB moves shows less tightening than Fed expectations. Rabobank noted that money markets price the ECB deposit rate at roughly 2.9% by December—up from the current 2.5%—and 3.4% by November 2027. This implies only about a 50% chance of a fourth hike beyond the three already priced in, far fewer than the Fed's expected tightening path.
Rabobank analysts stressed that currency and money markets expect "much more than a one-and-done hike" from the Fed, creating a growing divergence in rate expectations. The wider yield gap between the U.S. and eurozone is a structural headwind for the euro, limiting support from any modest ECB action.
Technical Levels Point to Further Downside Risk
EUR/USD's relative-strength index stands near 40, indicating persistent selling pressure but not yet oversold territory. FXStreet analysis shows immediate resistance at the 20-period moving average of 1.1589–1.1600, while key support sits at 1.1500 with potential downside toward 1.1490. A sustained break above 1.1589 would signal a meaningful rebound, but StoneX traders are "selling into strength" as MACD has turned negative and RSI trends lower.
Middle East Supply Shocks Amplify Energy Inflation Risk
Saudi Arabia reportedly canceled several September crude deliveries to European buyers after drone strikes forced an emergency shutdown of its East-West pipeline. Continued Houthi attacks have left the pipeline's reopening timeline uncertain, adding to global energy supply risks. This supply-side pressure on crude prices bolsters inflation expectations and keeps the U.S. dollar bid as a safe-haven currency.
EUR/CAD saw temporary relief as oil prices eased following a large U.S. crude inventory build, but renewed Middle East supply disruptions could quickly reverse those gains and support the Canadian dollar. ING noted that a dovish repricing by both central banks or a sustained drop in energy prices could help establish a floor for EUR/USD below 1.1500, but geopolitical risks remain a key wild card in currency markets.
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