The EUR/USD exchange rate declined to 1.1536 on Tuesday, reflecting a decrease of 0.11% for the session and marking the continuation of a four-day losing streak. The euro has experienced a decline in each session following the European Central Bank’s rate hike last Thursday, closing on Monday at approximately 1.1550, reflecting a decrease of 0.42%. This marks the first instance since late July that it has fallen below both its 50-day and 200-day exponential moving averages. The pair reached a one-month low on Monday and is currently trading slightly above that level ahead of Wednesday’s Federal Reserve decision. The level itself constitutes the narrative. The 50% Fibonacci retracement of the latest swing is positioned at 1.1533, which is three pips below the current price. The January swing low and the 38.2% retracement of the June advance create a support band ranging from 1.1534 to 1.1578. Currently, EUR/USD is positioned at the lower boundary of this band. A clean break of 1.1533 opens the 61.8% retracement at 1.1491, the 1.1472 level below it and, beyond that, the 1.1355 to 1.1365 zone that includes the 2026 low-day close. The daily reference rate published by the European Central Bank for September 15 stood at 1.1539, affirming the euro’s status at the lower end of its September range. The overarching reason for the decline is a policy misalignment that the market cannot overlook. The ECB raised its deposit rate by 25 basis points to 2.50% on September 10, with the change taking effect on Wednesday, September 16. On that same Wednesday, the Fed is anticipated to raise its target range by 25 basis points to 3.75% to 4.00%. The ECB’s hike reduces the policy gap to 125 basis points for a brief period before the Fed expands it again to 150 basis points. A euro-positive event is cancelled on the day it is set to take effect.
Inflation fails to account for that disparity. The U.S. Consumer Price Index is currently recorded at 3.4%. In August, inflation within the Eurozone reached 3.3%. The two economies confront a similar energy-induced price shock; however, following Wednesday’s developments, the Fed’s real policy rate will stand at a positive 0.60 percentage points, in contrast to the ECB’s rate, which will be at minus 0.80. Capital flows toward the positive real rate, which is represented by the dollar. The data flow today introduced an additional layer of complexity. The Eurozone ZEW economic sentiment index fell sharply to 25.8 in September, down from 31.4, contrary to forecasts that anticipated an increase to 39.9. With the 10-year Treasury at 5.041%, the dollar index above 99.50 and Brent at $107.90, EUR/USD approaches the Fed decision with all significant indicators aligned in the same direction. The thesis of this forecast is that 1.1533 determines whether the pair consolidates or extends toward 1.1430. The sequence since last Thursday illustrates the limited impact of the ECB’s tightening on the currency. On September 10, the Governing Council increased all three key rates by 25 basis points, resulting in a temporary dip of EUR/USD below 1.1600. However, it rebounded to close near 1.1610 during the New York session and maintained this level in early Asian trading on September 11. A hawkish central bank would typically bolster its currency. The euro exhibited minimal reaction to the decision. The reason was timing. The ECB hike occurred one day prior to the U.S. August CPI report and two days subsequent to a robust August PPI print. The U.S. inflation data indicated that headline CPI increased by 0.4% on a month-over-month basis and 3.4% on a year-over-year basis, while a crucial measure of underlying inflation experienced its most rapid growth in four months. The likelihood of a Fed rate hike surged, leading to the dollar asserting dominance over the pair.
Friday saw a continuation of the downward trend. By Monday, the euro was trading around 1.16, approaching its weakest level in over a week, with selling pressure intensifying throughout the session. The dollar appreciated against all major currencies on Monday, with EUR/USD concluding near 1.1550 following a decline of 0.42%. That close positioned the pair beneath the 50-day and 200-day exponential moving averages, which are separated by two pips. The same day, the 10-year Treasury yield briefly crossed 5% for the first time since 2023, while a Houthi strike on Saudi Arabia’s East-West pipeline necessitated a preventive shutdown, resulting in WTI crude surpassing $100. Tuesday’s Asian session witnessed a fourth consecutive decline. The pair traded below the mid-1.1500s, just above the one-month low reached on Monday, as demand for the dollar persisted ahead of the two-day FOMC meeting. The dollar appreciated by 0.11% relative to the euro and the pound, 0.22% against the yen, 0.29% compared to the Australian dollar, and 0.44% in relation to the New Zealand dollar during early trading. The European morning presented a fleeting examination. At 9:00, the German ZEW economic sentiment index recorded 34.7, reflecting a slight increase from 34.2, yet falling short of the 37 consensus estimate. The Eurozone reading declined to 25.8. The euro was unable to sustain any upward movement, and the pair declined to 1.1536 as U.S. trading commenced, coinciding with the 10-year Treasury yield rising to 5.041%.
The pattern observed across the four sessions demonstrates a notable consistency. Every euro-positive headline, from the ECB hike to Germany’s improved current conditions reading, has been sold. Every dollar-positive headline, from U.S. CPI to rising Treasury yields, has further propelled the movement. A currency that fails to strengthen despite its own central bank’s tightening indicates that the market perceives the rate trajectory through a U.S. perspective. The rate differential stands as the predominant influence on EUR/USD, and this week it shifts clearly in favour of the dollar. Begin with the European Central Bank. The Governing Council increased the deposit rate to 2.50% from 2.25% and raised the main refinancing rate to 2.65%, effective September 16. The action represented the second elevation of 2026, succeeding the increase in June and a subsequent pause in July. President Christine Lagarde characterised the decision as unanimous and straightforward, emphasising that future decisions will be contingent upon the incoming data presented at each meeting. The ECB refrained from making any pre-commitments regarding additional measures. Now the Federal Reserve. The current federal funds target range is between 3.50% and 3.75%. Fed funds futures indicate an 86.3% or higher probability of a quarter-point hike on Wednesday, which would elevate the range to 3.75% to 4.00%, marking the first increase since 2023. Measured from the apex of the Fed range to the ECB deposit rate, the disparity currently stands at 150 basis points. It narrows to 125 basis points on Wednesday morning when the ECB hike takes effect, then widens back to 150 basis points at 2:00 p.m. when the Fed statement is released.
The forward path holds greater significance than the spot gap. Futures pricing indicates the expectation of two quarter-point increases by the Federal Reserve by December. For the ECB, some investors perceive October 29 as the earliest opportunity for another adjustment and consider a December increase to be highly probable. Prior to the decision in September, market expectations indicated that the deposit rate would reach 2.70% by December. If both central banks fulfilll market expectations, the Federal Reserve would conclude the year with a rate between 4.00% and 4.25%, while the European Central Bank would be positioned around 2.75%, resulting in a differential of 150 basis points. The euro continues to face challenges in achieving convergence. Real rates accentuate the divergence. The U.S. Consumer Price Index is currently at 3.4%, with an upper bound of 4.00%, resulting in a real policy rate from the Federal Reserve of plus 0.60 percentage points. Eurozone inflation is currently at 3.3%, while a deposit rate of 2.50% results in the ECB’s real policy rate being positioned at minus 0.80. One central bank is operating under a restrictive monetary policy in real terms. The other remains accommodative, even in light of two rate hikes. The EUR/USD pair exhibits a pronounced inverse correlation with U.S. two-year Treasury yields across both short-term and long-term horizons. The 2-year yield was recorded at 4.63% on September 11 and has experienced an upward trajectory since that date. Every basis point increase in the U.S. front end consistently drives the pair lower more effectively than any European data release, which explains why the euro has disregarded its own central bank for four consecutive sessions.
