EUR/USD faces Fed decision after sharp pullback
EUR/USD is trading around 1.1540 on September 16 after a sharp decline from the 1.1630–1.1640 area ahead of today’s key event for the pair, the Fed’s interest rate decision. The market is almost fully pricing in a 25 bp rate hike, from the current 3.50–3.75% range to 3.75–4.00%.
1.1193
1.1226
According to estimates, the probability of such a move is around 90–93%, so the hike itself is already largely priced into the dollar. Much more important for EUR/USD will be the updated dot plot and comments from Fed Chair Kevin Warsh regarding whether today’s decision will mark the beginning of a series of rate hikes or a one-off response to inflation risks.
Inflation and labor data support tighter Fed stance
The Fed has more reasons to maintain a tighter stance. August CPI rose by 0.4% m/m and 3.4% y/y, while core inflation came in at 0.3% m/m and 2.4% y/y. Energy is adding further pressure, with the energy component of CPI rising by 2.1% over the month and 16.3% over the year.
At the same time, the labor market is not yet giving the Fed an obvious reason to remain on hold: the economy added 162K jobs in August, while the unemployment rate remained at 4.1%. Back in July, three FOMC members voted for a 25 bp rate hike, so today’s tightening looks like a logical continuation of the more hawkish bias that has already formed within the Committee.
ECB tightening provides partial support for euro
For the euro, the situation has also changed noticeably compared with the beginning of September. On September 10, the ECB raised the deposit rate by 25 bp to 2.50%, with the regulator directly linking the decision to persistent inflationary pressure caused by the conflict in the Middle East. The ECB now expects average inflation at 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028.
This provides some fundamental support for the euro, but for now it is being outweighed by expectations of a more aggressive Fed rate path. If the Fed raises rates today and at the same time signals that further hikes remain the baseline scenario, the divergence in rate expectations could once again support the dollar. Conversely, a 25 bp hike accompanied by cautious guidance on further moves could trigger profit-taking on long USD positions and support a recovery in EUR/USD.
1.1500 area stays key downside target
Although the risks of a decline toward 1.1500–1.1480 currently look high, the Fed keeping rates unchanged and/or a dovish tone in Fed comments could support a recovery in the pair toward 1.1580–1.1600. A rate hike and hawkish comments, as noted in EUR/USD stays under pressure as Fed decision approaches, could intensify bearish pressure.
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