Traders prepare for Fed and ECB rate decisions as euro slips below 1.1200

• Around 1.1170, EUR/USD trades lower in early Asian dealings on Tuesday.
• This week’s Fed and ECB policy decisions remain in focus as traders seek fresh direction.
• France retains its credit rating at Moody’s.

Near 1.1170 in Tuesday’s early Asian session, EUR/USD continues to retreat as risk aversion weighs on the pair. With interest rate decisions from the US Federal Reserve (Fed) and European Central Bank (ECB) due later this week, markets may become more cautious as the day progresses.

Last month’s 25 basis point (bps) increase took the Fed’s interest rate range to 3.75% to 4%, marking its first rise since 2023. At Wednesday’s October meeting, however, the US central bank is expected to hold rates steady.

According to the CME FedWatch tool, Fed funds futures now imply just a 10% chance of a further quarter-point rate rise at the October policy meeting. The probability of at least one increase by year-end stands at nearly 75%.

Heather Long, chief economist at Navy Federal Credit Union, said: “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,” adding: “For consumers, it means really high borrowing costs for the foreseeable future.”

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

Despite steadily mounting debt and political fragmentation that has hampered efforts to curb borrowing, France retained its Aa3 credit rating at Moody’s Ratings last week, according to the Wall Street Journal. The decision allayed concerns that the country’s fiscal difficulties could prompt a wider repricing of Eurozone assets, potentially limiting further losses for the single currency.

Against a backdrop of weakening economic momentum, the ECB is expected to hold its key interest rate steady on Thursday. A Reuters survey of economists points to a 25 bps rise at the December meeting. For indications of the bank’s future policy path, traders will scrutinise remarks from the ECB’s Christine Lagarde.

Euro stays under pressure as energy shock and French risks put ECB in focus

Rising energy costs and concerns over France continue to weigh on the Euro, according to MUFG analysts. They describe its recovery at the beginning of the week as “modest” following “falling to fresh year-to-date lows against the Pound and Yen,” which has left it “the worst performing G10 currency this month”. Sentiment, they say, is being eroded by “rising energy prices and heightened investor concerns over fiscal and political risks in France.” On energy, the analysts note 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 development that is “reinforcing stagflation risks for the euro area economy.” Although they acknowledge that “so far this year the euro area economy has proven more resilient than expected to the energy price shock,” MUFG warns that “the release of the euro area PMI survey at the end of last week signalled that growth momentum may be about to soften.”

In assessing the implications of the rating decision, MUFG says: “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.” The analysts see greater scope for a market reaction to the central bank, noting that “the ECB’s upcoming policy meeting has more potential to be a bigger market mover,” while cautioning that “we believe it is too soon to expect the ECB to announce policy measures to support government bond markets.”

Fed retains hawkish tilt as Warsh highlights investment surge and AI risks

At 5.6/10, Fed Chair Warsh’s FXS Speechtracker reading sits modestly below the historical average of 6.1/10. The score indicates a cautious tone in his speech, notwithstanding optimism about structural growth and a surge in investment. By acknowledging that he is “over-scarred from the global financial crisis”, Warsh underlines a continuing preference for protection against tail risks. At the same time, he points to policy-led investment strength without committing in advance to a course of action at the October or December meetings. His emphasis on AI as a near-term demand shock, its uncertain effects on employment and spillovers to financial stability adds caution to an otherwise positive account of the US economy and the Dollar.

A 0.00-point movement left the FXS Fed Sentiment Index unchanged at an elevated 127.51. Despite the slightly softer FXS Speechtracker reading, this suggests that the speech did little to alter the Fed’s broadly hawkish policy stance. As the sentiment index remains firmly above its neutral 100 level, markets are likely to view Warsh’s comments on price stability, the investment surge and AI-related risks as consistent with a continued preference for restrictive policy. That stance supports the Dollar against the Euro and Yen.

Technical Analysis: EUR/USD retains bearish bias beneath the 100-day SMA

Trading below both the 100-day simple moving average (SMA) and the middle Bollinger band, EUR/USD maintains a bearish near-term outlook on the daily chart. The pair is hovering just above support at the lower Bollinger band, suggesting an attempt at short-term stabilisation. Yet an RSI (Relative Strength Index) reading of 34 leaves it close to bearish territory: despite a small rebound from recent lows, downward pressure continues to dominate.

A recovery would first encounter resistance around 1.1215 at the middle Bollinger band, ahead of the upper band at 1.1295. Beyond that, the 100-day SMA at 1.1445 provides a more substantial structural barrier. Immediate support, meanwhile, lies at the lower Bollinger band of 1.1140. A clear break beneath that area would allow the broader downtrend to resume; holding above it would instead leave the pair in corrective consolidation below a cluster of resistance levels.

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