The EUR/USD pair has experienced a decline, approaching the 1.1380 level during on Monday. Hawkish remarks from the Federal Reserve have bolstered expectations for additional tightening measures. Markets are currently assigning approximately a 45% probability to an additional 25 basis points rate hike by the ECB in October. The EUR/USD pair declines to approximately 1.1380 in the early Asian session on Monday, influenced by hawkish signals from the Federal Reserve and rising tensions in the Middle East. Traders prepare for the Retail Sales and Consumer Price Index inflation reports from Germany later on Wednesday, seeking new momentum. Many Fed officials delivered hawkish remarks last week, with Cleveland Fed President Beth Hammack stating on Friday her concerns regarding persistently high inflation potentially conditioning the American public to accept elevated prices as the norm, emphasising that the central bank cannot allow that to occur. Philadelphia Fed President Anna Paulson stated, “Some modest further tightening may be warranted.” Markets are currently assigning a probability of approximately 65.9% to the likelihood of a benchmark rate hike by the Fed in October, an increase from 57.6% just a week prior and up from 9.4% a month ago, as indicated by the CME FedWatch tool.
Furthermore, escalating tensions in the Middle East may enhance safe-haven flows, thereby bolstering the Greenback. US President Donald Trump stated on Sunday that he anticipates a swift victory in the conflict with Iran, suggesting that further military actions before the midterm elections could be on the horizon. Meanwhile, Iran maintains its stance that it will only reopen the vital waterway if its demands are satisfied, while a high-ranking Iranian military official emphasised the nation’s preparedness to persist in its military efforts. The European Central Bank raised its key deposit rate by 25 basis points to 2.50% at its September policy meeting. Markets are currently assigning approximately a 45% probability to an additional 25 basis points rate increase in October, with the expectation of a further hike fully incorporated only by December at the earliest, as reported. That creates significant potential for forthcoming data to influence expectations. Strategists 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. Fed’s Hammack conveys a moderately hawkish stance, reflected in an FXS Speechtracker score of 7.2/10, which is marginally below the historical average of 7.5/10. The emphasis is now on the risks associated with an entrenched “inflationary mindset” following an extended duration of price pressures exceeding target levels. 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; however, the slight dip compared to the established baseline indicates a marginally reduced sense of urgency relative to previous communications. The FXS Fed Sentiment Index decreased by 0.34 points to 147.72, reflecting a slight retreat in perceived hawkishness subsequent to the speech.
Despite this decline, the index remains firmly in hawkish territory well above the neutral 100 mark, indicating that, in aggregate, Fed communication still reflects a restrictive policy bias even as the latest Hammack remarks show a slight sentiment moderation in the FXS Fed Sentiment Index and FXS Speechtracker. In the daily chart, EUR/USD continues to experience pronounced bearish pressure, remaining significantly below the 100-day simple moving average and the middle line of the Bollinger Bands, which serve to limit upward movement and strengthen a negative short-term outlook. The Relative Strength Index (14) is currently positioned in oversold territory at approximately 27, indicating that although downside momentum remains robust, the extent of the sell-off appears to be reaching a limit. 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 concentrated in the 1.1525-1.1530 range, characterised by the Bollinger middle band and the 100-day SMA, with a further obstacle at the upper Bollinger Band around 1.1708; only a recovery above these thresholds would alleviate the prevailing bearish sentiment.
