Euro Holds Firm as Hawkish Fed Rhetoric Caps Further Gains

Key Moments

EUR/USD Edges Higher but Faces Policy Headwinds

EUR/USD is trading on the front foot near 1.1590 in the early European session on Monday, extending its recent recovery while remaining sensitive to shifting interest rate expectations. The move comes as markets digest a more hawkish policy signal from the Federal Reserve, which is tempering the pair’s upside potential despite the current positive tone.

Following remarks from Federal Reserve (Fed) Chair Kevin Warsh, traders increased wagers on further policy tightening, limiting enthusiasm for additional Euro strength. The first notable resistance on the upside is located at 1.1677, while immediate support is identified at 1.1570.

Fed Rhetoric Reinforces Hawkish Bias, Supports Dollar

Fed Chair Warsh stated on Friday at the Jackson Hole economic symposium that the US central bank will “have work to do” if policymakers don’t get the confidence they need that inflation is heading down to 2%. His comments strengthened expectations for a potential September rate increase, providing a tailwind for the US Dollar (USD) against the Euro (EUR).

Strategists at Commerzbank noted that “the main theme on Friday was the hawkish repricing of Fed expectations” after Warsh’s Jackson Hole appearance. They emphasized that Warsh warned inflation is “not meaningfully slowing” and reiterated that the Fed’s 2% inflation objective is “firm and fixed,” stressing that policymakers have “work to do” if they lack confidence that underlying inflation is converging toward that target.

Warsh’s Message Keeps Focus on Inflation and Restrictive Policy

Fed Chair Warsh adopted a clearly more hawkish-leaning tone, reflected in an FXS Speechtracker score of 7.4 compared with a historical average of 6.5. This signals heightened concern about inflation even as growth and labor market conditions remain solid.

His insistence that the Fed must be confident that underlying inflation is moving to target or “we have work to do,” alongside the view that financial conditions are not restrictive and credit markets show limited signs of policy restraint, points toward a bias for additional tightening or an extended period of restrictive policy. This is occurring even though headline inflation readings have improved, as underlying trends are still assessed as largely unchanged. Warsh’s emphasis that the Fed’s 2% PCE goal is “firm and fixed” and that the dominant focus should be on prices underscores that the inflation challenge is not yet convincingly resolved, a backdrop that generally supports the Dollar on dips.

The FXS Fed Sentiment Index was unchanged, moving 0.00 points to a still-elevated 129.70. This indicates that the overall policy tone remains decisively hawkish despite the July decision to pause. With both a high sentiment index level and an above-baseline FXS Speechtracker score, markets are likely to continue discounting a vigilant Fed stance, keeping the Dollar underpinned while inflation progress is perceived as incomplete.

Data Watch: German Inflation in Focus

Market participants are awaiting the preliminary release of Consumer Price Index (CPI) inflation figures from Germany, due later on Monday. Any indication of stronger-than-expected inflation in Germany could lend additional near-term support to the common currency.

Technical Picture: Bullish Bias Above the 100-Day SMA

From a technical standpoint, EUR/USD retains a mildly bullish short-term posture on the daily chart, as the pair trades above the 100-day simple moving average (SMA) and hovers just below the 20-day Bollinger SMA, which is acting as an immediate pivot level. The 14-day Relative Strength Index (RSI) stands at 52.8, marginally above the neutral threshold, suggesting buyers have a slight edge without the market entering overbought territory.

On the upside, the first resistance level is aligned with the August 26 peak at 1.1677. A more substantial hurdle is seen near the upper Bollinger band around 1.1710, which lies on the way to the May 8 high at 1.1788.

On the downside, the 100-day SMA at 1.1570 represents immediate support. Below that, attention shifts to the August 13 trough at 1.1511, with the lower Bollinger band in the vicinity of 1.1480 expected to attract more robust dip-buying interest if a deeper correction unfolds.