EUR/USD softens to approximately 1.1170 during the early Asian session on Tuesday. Traders are poised for the upcoming Federal Reserve and European Central Bank policy meetings later this week, seeking new momentum. Moody’s has decided to maintain France’s credit rating at its current level. The EUR/USD pair extends its decline near 1.1170 during the early Asian trading hours on Tuesday, influenced by prevailing risk-off sentiment. Markets may exhibit a degree of caution as the day progresses, in anticipation of the upcoming interest rate decisions from the US Federal Reserve and the European Central Bank later this week. The Fed decided to raise interest rates by 25 basis points to a range of 3.75% to 4% last month, marking its first hike since 2023. However, the US central bank is expected to maintain interest rates at their current levels during the upcoming meeting in October on Wednesday. Fed funds futures currently indicate a mere 10% likelihood that the Federal Reserve will implement an additional quarter-point rate increase during its October policy meeting, as per the CME FedWatch tool. Nearly 75% expect at least one rate increase by year-end. “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,” said Heather Long. “For consumers, it means really high borrowing costs for the foreseeable future.”
However, “given that it’s right before an election,” Heather added, “they won’t hike in October.” Moody’s Ratings maintained France’s credit rating at Aa3 last week, even as the country experiences a continuous increase in its debts and political fragmentation that complicates efforts to control borrowing, according to the source. This alleviated concerns that France’s fiscal challenges could lead to a wider reassessment of Eurozone assets, potentially limiting the downside for the common currency. The ECB is poised to maintain its key interest rate on Thursday, reflecting a backdrop of diminishing economic momentum. Economists anticipate a 25 basis points increase at the December meeting. Traders will pay close attention to remarks from ECB President Christine Lagarde for insights into the bank’s future trajectory. Analysts note that the Euro has only managed a “modest” recovery at the start of the new week after “falling to fresh year-to-date lows against the Pound and Yen,” leaving it “the worst performing G10 currency this month” as sentiment is undermined by “rising energy prices and heightened investor concerns over fiscal and political risks in France.” They highlight 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 move that is “reinforcing stagflation risks for the euro area economy.” While MUFG points out that “so far this year the euro area economy has proven more resilient than expected to the energy price shock,” they caution that “the release of the euro area PMI survey at the end of last week signalled that growth momentum may be about to soften.”
Against this backdrop, MUFG argues that “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.” Looking ahead, they stress that “the ECB’s upcoming policy meeting has more potential to be a bigger market mover,” but add that “we believe it is too soon to expect the ECB to announce policy measures to support government bond markets.” Fed Chair Warsh’s speech scores 5.6 out of 10 on the FXS Speechtracker, indicating a modestly softer performance compared to the historical average of 6.1 out of 10. This score reflects a cautious tone, even in light of optimism regarding structural growth and a surge in investment. The acknowledgement of being “over-scarred from the global financial crisis” emphasises a continued inclination to protect against tail risks, even as Warsh points out the robustness of policy-driven investments and avoids making commitments regarding the October and December meetings. Warsh’s emphasis on AI as a near-term demand shock with ambiguous effects on employment, along with his concerns regarding financial stability spillovers, underscores a cautious perspective that moderates the otherwise optimistic outlook on the US economy and the Dollar.
The FXS Fed Sentiment Index remained stable, registering no change at a high level of 127.51. This indicates that the speech has maintained the Fed’s hawkish policy stance, even in light of the marginally lower FXS Speechtracker score. With the FXS Fed Sentiment Index firmly above the neutral 100 mark, markets are likely to interpret Warsh’s remarks on price stability, investment surge, and AI-related risks as consistent with a Federal Reserve that remains inclined toward restrictive policy, supportive of the Dollar against the Euro and Yen. In the daily chart, EUR/USD demonstrates a continued bearish near-term bias, with the spot price remaining below the 100-day simple moving average and under the Bollinger middle band. Price is maintaining a position just above the lower Bollinger band support, indicating a potential short-term stabilisation effort. Meanwhile, the Relative Strength Index at 34 suggests that the pair remains near bearish territory, implying that downside pressure continues to prevail despite a minor rebound from recent lows. On the topside, initial resistance emerges at the Bollinger middle band around 1.1215, followed by the upper band at 1.1295, with the 100-day SMA at 1.1445 acting as a stronger structural cap should recovery attempts extend. On the downside, immediate support is provided by the lower Bollinger band at 1.1140; a decisive break below this zone would open the door for a continuation of the broader downtrend, while holding above it would maintain the pair in a corrective consolidation beneath the clustered overhead resistance.
