Why is the Euro slipping below 1.1200 as traders prepare for Fed, ECB rate decisions?

• Selling pressure takes EUR/USD towards 1.1170 during early Asian trade on Tuesday.
• This week’s Fed and ECB policy decisions are in focus as traders look for fresh direction.
• France’s credit rating is retained by Moody’s.

Risk aversion weighs on EUR/USD, with the pair extending its losses to trade near 1.1170 in Tuesday’s early Asian session. Caution could build in markets later in the day as traders look ahead to interest rate decisions from the US Federal Reserve (Fed) and European Central Bank (ECB) later this week.

An unchanged interest rate is the likely outcome of the US central bank’s October meeting on Wednesday. Last month, the Fed delivered its first increase since 2023, raising rates by 25 basis points (bps) to a range of 3.75% to 4%.

According to the CME FedWatch tool, Fed funds futures now imply just a 10% chance of another quarter-point rate increase 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, pointed to persistent price pressures: “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,” she said. “For consumers, it means really high borrowing costs for the foreseeable future.”

Heather nevertheless ruled out an October increase, adding, “given that it’s right before an election,” and concluding, “they won’t hike in October.”

Despite steadily rising debt and political fragmentation that has complicated efforts to curb borrowing, France retained its Aa3 credit rating from Moody’s Ratings last week, according to the Wall Street Journal. The decision reduced concerns that the country’s fiscal difficulties could spark a wider repricing of Eurozone assets. That relief might limit further losses in the single currency.

With economic momentum fading, the ECB is expected to hold its key interest rate steady on Thursday. A 25 bps increase at the December meeting is forecast by economists polled by Reuters. For indications of the bank’s policy path, traders will scrutinise remarks from the ECB’s Christine Lagarde.

Can the ECB ease pressure on the Euro as energy costs and France risks weigh?

Rising energy costs and concerns about France continue to weigh on Euro sentiment, according to MUFG analysts. They describe the currency’s recovery at the beginning of the new week as merely “modest” after “falling to fresh year-to-date lows against the Pound and Yen,” making it “the worst performing G10 currency this month”. The analysts attribute the weak sentiment to “rising energy prices and heightened investor concerns over fiscal and political risks in France.” On energy, they observe 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,” which is “reinforcing stagflation risks for the euro area economy.” Although “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.”

For French bonds and the Euro, MUFG sees limited reassurance from the ratings decision: “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 instead identify the policy decision as the more significant catalyst, 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.”

Do Warsh’s investment and AI remarks alter the Fed’s hawkish stance?

A cautious undertone runs through Fed Chair Warsh’s speech, notwithstanding his optimism about structural growth and a surge in investment. The FXS Speechtracker assigns it a score of 5.6/10, slightly softer than the historical average of 6.1/10. His acknowledgement of being “over-scarred from the global financial crisis” points to an enduring preference for protection against tail risks, even as he emphasises policy-led investment strength and avoids committing in advance to decisions at the October and December meetings. By treating AI as a near-term demand shock with unclear consequences for employment, and highlighting spillovers to financial stability, Warsh maintains a risk-conscious approach. This qualifies the otherwise positive assessment of the US economy and the Dollar.

Despite the marginally softer FXS Speechtracker reading, the FXS Fed Sentiment Index registered a 0.00-point change and remained elevated at 127.51, indicating that the speech broadly preserves the Fed’s hawkish policy bias. The index remains comfortably above its neutral 100 threshold. Markets are therefore 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, lending support to the Dollar against the Euro and Yen.

Technical Analysis: Can EUR/USD shake off its bearish bias below the 100-day SMA?

Selling pressure continues to dominate EUR/USD’s near-term outlook on the daily chart, with spot trading beneath both the 100-day simple moving average (SMA) and the middle Bollinger band. A tentative effort to stabilise is evident as the pair holds just above support at the lower Bollinger band. However, the Relative Strength Index (RSI) reading of 34 leaves it close to bearish territory, indicating that the modest rebound from recent lows has not displaced the prevailing downside pressure.

Any recovery would first encounter resistance near 1.1215 at the middle Bollinger band, ahead of the upper band at 1.1295. Beyond these levels, the 100-day SMA at 1.1445 provides a firmer structural barrier to an extended rebound. Immediate downside support, meanwhile, lies at the lower Bollinger band at 1.1140. A clear breach of this area would pave the way for the broader downtrend to continue; a sustained hold above it would instead leave EUR/USD consolidating correctively below the cluster of overhead resistance.

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