Euro weakens below 1.1450 on hawkish Fed signals, German political risks
- EUR/USD softens to around 1.1445 in Wednesday’s early Asian session.
- Fed's Collins delivered hawkish remarks, saying that she supported a rate hike.
- Merz's party suffered a historic loss in a regional election, weighing on Eurozone sentiment.
The EUR/USD pair loses ground to near 1.1445 during the early Asian trading hours on Wednesday. The US Dollar (USD) strengthens against the Euro (EUR) on the hawkish stance of the US Federal Reserve (Fed) and the prospect of further interest rate hikes. Traders brace for the preliminary readings of the Purchasing Managers’ Index (PMI) from Germany, the Eurozone and the US, which are due later on Wednesday.
Boston Fed President Susan Collins said on Tuesday that she supported the US central bank's decision last week to raise interest rates in the face of risks that future inflation will be above the 2% target. "I now see an increased likelihood of future scenarios in which inflation remains notably above 2%,” Collins added.
Earlier on Monday, St. Louis Fed President Alberto Musalem said that additional rate increases may be necessary to achieve the Fed’s inflation target.
The US central bank last week decided to raise its interest rate target by 25 basis points (bps) to the 3.75%-4.00% range, and policymakers penciled in another rate increase before the year-end. Traders are now pricing in nearly an 89.2% chance of a US rate hike in December, according to the CME FedWatch Tool.
Across the pond, rising political risks in Germany could weigh on Eurozone sentiment and drag the shared currency lower. The far-right Alternative for Germany (AfD) party secured major wins, handing Chancellor Friedrich Merz’s conservative coalition its worst regional election defeat in postwar Germany, leaving the government fragile.
Euro supported as softer oil and yield spreads underpin EUR-USD fair value
Strategists at Scotiabank point out that the “renewed decline in the price of oil is a positive for the EUR, given the euro area’s terms of trade and its dependence on energy imports.” They add that yield differentials continue to work in the single currency’s favour, noting that “yield spreads remain supportive, with a narrow (2Y Germany-US yield spread only) FV estimate hovering just above 1.15.”
Collins flags higher inflation risks, backing a more restrictive Fed stance
Fed's Collins delivered a notably more hawkish tone, with the 8.1/10 FXS Speechtracker score standing well above the 6.6/10 historical average, underscoring a firmer commitment to tightening. The emphasis on an "increased likelihood" that inflation stays "notably above 2%" and the view that a stronger labor market allows policy to focus squarely on restoring price stability after years of elevated inflation point to support for keeping the FEDERAL FUNDS RATE somewhat more restrictive for longer. This combination of heightened inflation concern and confidence in labor market resilience is typically supportive of the Dollar and negative for risk-sensitive currencies.
The FXS Fed Sentiment Index rose by 0.53 points to 150.49, reinforcing that the broader Fed communication backdrop remains firmly in hawkish territory. With the index far above the neutral 100 mark and the latest speech scoring well above the established baseline, the data signal persistent upside risks for U.S. yields and the Dollar as markets price in a longer period of restrictive policy.
Technical Analysis: EUR/USD remains capped under the 100-day SMA
In the daily chart, EUR/USD maintains a bearish near-term tone as it holds below both the 100-day moving average (MA) and the Bollinger Bands’ 20-day simple moving average (SMA) center line. Price is only slightly above the lower Bollinger band, suggesting the pair is hovering near the lower edge of its recent volatility envelope, while the Relative Strength Index (14) at 31.7 flirts with oversold territory and hints at stretched downside momentum rather than a confirmed reversal.
On the topside, initial resistance emerges at the 100-day MA at 1.1540, followed closely by the Bollinger 20-day SMA center band at 1.1562, which together define a dense cap ahead of any meaningful recovery, with the upper Bollinger band near 1.1700 acting as a more distant hurdle. On the downside, immediate support is seen at the lower Bollinger band around 1.1425, and a sustained break beneath this level would likely open the door to a continuation of the bearish trend, while holding above it could trigger a period of consolidation below the cited moving-average cluster.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Euro FAQs
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%).
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.
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.
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.
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.