EUR/USD traded at 1.1580 on Wednesday, September 2, after slipping to 1.1575 during the early European session – the lowest level in two weeks. The pair declined for a second consecutive day, concluding Tuesday in negative territory at 1.1601 after reaching an intraday low of 1.1587 and losing 0.14% during the session. Tuesday’s rally attempt encountered resistance at the 1.1620 level, marking the second rejection at this threshold within the span of a week. The three-session sequence reflects a controlled distribution rather than a state of panic. Monday commenced with an effort to establish stability at 1.1587. Tuesday reached 1.1620 but was unable to maintain that level. On Wednesday, the currency surpassed the 1.1600 mark and subsequently recorded a low of 1.1575. That represents 45 pips of range compression with each bounce being sold, and the pair has now retraced the entirety of the recovery it experienced following Jackson Hole. Context from the year’s arithmetic: EUR/USD commenced 2026 at 1.1721. At 1.1580, the euro has depreciated by 1.20% against the dollar on a year-to-date basis. The pair has fluctuated within a band of 1.14 to 1.20 throughout the calendar year, positioning the current spot 3.4% below the upper limit of that range and 1.6% above the lower limit. The dollar side is performing all the necessary functions. The Dollar Index traded 0.1% higher near 99.75 on Wednesday, marking its highest level in over two weeks. GBP/USD declined toward 1.3500. AUD/USD decreased by 0.1%, settling at approximately 0.7135. This is a comprehensive strengthening of the dollar, propelled by two converging forces rather than an issue specific to the euro.
The thesis for this forecast is the aspect that most participants are misinterpreting: currently, this is not a rate-differential trade. Both central banks are poised to increase rates by 25 basis points within a span of six days. The Federal Reserve convenes on September 15-16, with approximately 70% probability of a policy adjustment, while the European Central Bank is set to meet on September 10, where a 25-basis-point increase to 2.50% is nearly fully priced in. If both deliver, the policy gap concludes the month precisely at its initial position. The decline in EUR/USD can be attributed to the safe-haven demand for the dollar, spurred by the intensifying conflict in the Persian Gulf, alongside a terms-of-trade shock that adversely affects net energy importers more significantly than net energy exporters. That distinction dictates the trading position of the pair as we move into October. The greenback is being purchased for two distinct reasons concurrently, and distinguishing between them is crucial for the forecast. The first is monetary. Increased speculation regarding a potential interest rate hike by the Federal Reserve on September 16 has directly bolstered demand for the dollar. The 2-year Treasury yield increased to 4.33% and subsequently to 4.369%, marking its highest settlement in 19 months. The 10-year advanced for a sixth consecutive session to 4.814%, its highest since late 2023. The 30-year was positioned at 5.27%. Front-end yield expansion serves as the primary catalyst for currency carry, and the Dollar Index has regained support as these front-end yields rise, reinforcing the inverse relationship between DXY and rates.
The second factor is geopolitical in nature. Escalating hostilities between the U.S. and Iran are dampening risk appetite across all asset classes, with the dollar continuing to serve as the primary refuge for that capital flow. Indicators of escalating tensions in the Middle East are enhancing the appeal for safe-haven assets, thereby bolstering the dollar and presenting a direct challenge for the major currency pair. The distinctive characteristic of this configuration is that both channels are orientated in the same direction. In typical risk-off scenarios, the demand for the dollar as a safe haven aligns with declining yields as capital shifts into Treasuries – the currency appreciates, yet the carry weakens, resulting in a limited impact on EUR/USD. Currently, the demand for safe-haven assets and the pursuit of higher interest rates are mutually reinforcing, as the geopolitical shock is characterised by inflationary rather than deflationary pressures. That is why the pair has breached 1.1600 despite the absence of any deterioration in European data. The euro is currently not available for sale. The dollar is experiencing dual purchasing activity. The comparison across the majors confirms that the pattern is driven by the dollar rather than being specific to the euro. Sterling at 1.3500, the Australian dollar at 0.7135, and the euro at 1.1580 all exhibited a synchronised movement on the same day, coinciding with the Dollar Index reaching a two-week-plus high near 99.75. The vulnerability in this setup lies in the fact that a double bid unwinds at twice the speed when one leg encounters failure. A ceasefire headline out of Hormuz, or a payrolls print that kills the September hike, removes one pillar and forces a repricing of the other. That asymmetry is valuable to retain.
Federal Reserve Chairman Kevin Warsh delivered his inaugural keynote at Jackson Hole on Friday, August 28, effectively recalibrating the dollar’s trajectory with a single address. He informed the audience that the Fed’s favoured inflation measure stands at 3.7%, almost twice the 2% target, and that the enhanced readings from the summer did not indicate that the fundamental trends had significantly altered. His formulation was straightforward: without clearer evidence that inflation is returning to target, the central bank would “have work to do. The repricing has compounded with each subsequent session since then. The CME FedWatch odds of a 25-basis-point hike in September increased from around 35% prior to the speech to 57% by Monday. This figure rose to 60.4%, then 66.1%, and remained above 66% by Tuesday, ultimately reaching approximately 70% by Wednesday morning. Forward pricing currently indicates 17 basis points of Federal Reserve tightening for the September 16 FOMC meeting, suggesting that the market is considering this move as the base case rather than merely a risk. The supporting cast provided additional validation. Boston Fed President Susan Collins articulated a lower threshold for interest rate hikes than she previously established, marking a departure from the June meeting when she indicated no changes through the end of the year. Kansas City Fed President Jeff Schmid and Cleveland Fed President Beth Hammack both adopted more aggressive hawkish stances.
The magnitude of the reversal distinguishes it as a currency event rather than a rates event. Two weeks prior to Jackson Hole, the prevailing consensus indicated that the Federal Reserve would maintain the target range at 3.50%-3.75% for the remainder of 2026, with any reductions postponed until 2027, and a fully priced 25-basis-point increase anticipated in January 2027. The EUR/USD exchange rate was maintaining a position close to 1.1670 based on that assumption, with a widely accepted projection of 1.17 for September and a year-end trajectory of 1.18. Ten trading days later, the pair is positioned at 1.1580, while the September FOMC reflects a 70% probability of the initial rate hike in this cycle. The complication that traders are currently navigating is whether energy prices will compel the Fed to act independently of the labour data. Rising input costs add complexity to the inflation forecast, making it increasingly challenging for the committee to maintain the current interest rates if crude prices continue to rise leading up to the meeting. That dynamic links the dollar directly to Brent, contrasting with the relationship typically assumed by most currency models.
