Euro declines below 1.1400 on hawkish Fed stance, ongoing Middle East tensions

EUR/USD declines to near 1.1380 in Monday’s early Asian session.
Hawkish Fed remarks strengthened expectations for further tightening.
Markets are currently pricing nearly a 45% odds of another ECB 25 bps rate hike in October.

The EUR/USD pair edges lower to around 1.1380 during the early Asian session on Monday, pressured by hawkish signals from the Federal Reserve (Fed) and escalating Middle East tensions. Traders brace for the Retail Sales and Consumer Price Index (CPI) inflation reports from Germany later on Wednesday for fresh impetus.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Many Fed officials delivered hawkish remarks last week, with Cleveland Fed President Beth Hammack saying on Friday that she is worried that persistently high inflation risks conditioning the American public to accept elevated prices as the ‌norm, adding the central bank cannot let that happen. Philadelphia Fed President Anna Paulson said, "Some modest further tightening may be warranted.”

Markets are now pricing in nearly a 65.9% odds of the Fed October benchmark rate hike, up from 57.6% a week earlier and 9.4% a month earlier, according to the CME FedWatch tool.

Furthermore, rising tensions in the Middle East could boost safe-haven flows, supporting the Greenback. US President Donald Trump said on Sunday that he believes the war with Iran will be won “very soon,” adding that additional military strikes before the midterm elections are possible.

Meanwhile, Iran sticks to its position that it would only reopen the crucial waterway if its conditions are met, while a senior Iranian military leader stressed his country’s readiness to continue fighting.

The European Central Bank (ECB) raised its key deposit rate by 25 basis points (bps) to 2.50% at its September policy meeting. Markets are currently pricing roughly a 45% chance of another 25 bps rate hike in October, with a further rate hike fully priced only by December at the earliest, according to Reuters. That leaves plenty of room for incoming data to move expectations.

Euro slide seen as stretched with downside limited unless supports give way

Strategists at UOB Group note that the Euro’s latest leg lower has exceeded their earlier expectations. In their 1–3 weeks view, they recall that in their last update on Wednesday, 23 September, when EUR/USD was trading around 1.1450, they had highlighted that “there is a chance for EUR to test 1.1400, but the odds for a sustained decline below this level are not high.” However, they point out that the subsequent “breach of 1.1400 triggered a sharp decline that reached a low of 1.1358 yesterday.”

While acknowledging that “EUR could weaken further,” UOB argues that “the deeply oversold conditions suggest that the scope for additional downside may be relatively limited.” They emphasise that “the decline in EUR that started two weeks ago … has been substantial,” and draw attention to “two strong support levels, at 1.1355 and 1.1325.” On the topside, UOB flags that “a breach of 1.1430 (‘strong resistance’ level previously at 1.1490) would indicate that the weakness in EUR is stabilising,” marking that zone as a key threshold for any near-term recovery in the Euro.

Hammack flags inflation mindset risk as Fed keeps policy stance restrictive

Fed’s Hammack delivers a moderately hawkish message, with a FXS Speechtracker score of 7.2/10, slightly below the 7.5/10 historical average, as the focus shifts to the danger of an entrenched “inflationary mindset” after a prolonged period of above-target price pressures. The emphasis on solid growth, a stable job market, and demand- and capex-driven inflation risks, alongside the warning that expectations could shift if progress stalls, underscores a clear preference for maintaining a restrictive policy stance to re-anchor inflation expectations. Overall, the tone leans hawkish, but the slight dip versus the established baseline suggests marginally less urgency than in past communications.

The FXS Fed Sentiment Index slipped by 0.34 points to 147.72, indicating a modest pullback in perceived hawkishness following the speech. Despite this decline, the index remains firmly in hawkish territory well above the neutral 100 mark, signaling that, in aggregate, Fed communication still points to restrictive policy bias even as the latest Hammack remarks register a small sentiment moderation in the FXS Fed Sentiment Index and FXS Speechtracker.

Technical Analysis: EUR/USD retains a negative outlook below the 100-day SMA

In the daily chart, EUR/USD remains under clear bearish pressure, holding well below the 100-day simple moving average (SMA) and the Bollinger Bands’ middle line, which cap the topside and reinforce a negative near-term bias. The Relative Strength Index (14) sits in oversold territory near 27, hinting that while downside momentum is strong, the sell-off is becoming stretched.

On the downside, immediate support emerges at the lower Bollinger Band around 1.1340, where sellers may hesitate to push prices further without a corrective bounce. On the topside, initial resistance is clustered in the 1.1525–1.1530 area, defined by the Bollinger middle band and the 100-day SMA, with a subsequent barrier at the upper Bollinger Band near 1.1708; only a recovery above these levels would ease the current bearish tone.

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

Euro FAQs

What is the Euro?

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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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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