Euro Edges Higher as EUR/USD Downtrend Signals Persist

Key Moments

Fundamental Drivers: Fed and ECB Policy Paths

EUR/USD is trading in positive territory near 1.1490 in early European dealings on Friday, as a weaker US Dollar provides some short-term support. Despite this, the pair’s advance may be constrained by expectations that the Federal Reserve will maintain a hawkish stance following its latest rate move. Market participants are watching for additional guidance from Fed Governor Michelle Bowman’s speech later on Friday.

The Federal Reserve has raised its benchmark interest rate by 25 basis points, bringing the target range to 3.75% to 4%. This marks the first rate increase since July 2023 and forms part of the central bank’s ongoing efforts to curb inflation.

On the European side, the European Central Bank has also tightened policy, lifting its key deposit rate by 25 basis points to 2.50% from 2.25%. This move was widely anticipated by investors. According to Bloomberg economists, the ECB is expected to wait until December before implementing a final rate hike aimed at addressing inflation pressures linked to conflict in the Middle East.

Survey respondents in a Bloomberg poll expect the ECB Governing Council to raise the deposit rate to 2.75% at its last meeting of the year, while forgoing a hike at the late October meeting.

Inflation Outlook and Rate Expectations in the Euro Area

Commentary from Scotiabank strategists indicates that the latest euro area inflation figures have not materially altered the policy outlook. They note that the “final euro area CPI release” offered “little in terms of surprise.” In their assessment, “headline inflation [is] remaining in the low 3% area and core hovering in the mid-2% range,” levels that they say continue to justify a firm policy stance from the ECB.

The strategists also point out that “messaging from the ECB remains hawkish,” a tone they see reflected in current market pricing. Investors, they say, now assign “just over 50% chance of a hike in October with a cumulative 36 bpts of tightening by December.”

Technical Picture: Bearish Bias Below the 100-day SMA

From a technical standpoint, EUR/USD retains a negative short-term structure on the daily chart, as the spot price continues to trade under the 100-day simple moving average and beneath the middle line of the Bollinger Bands. The pair is trading just above the lower Bollinger band, signaling sustained downward pressure.

The 14-period Relative Strength Index stands near 38, indicating weak momentum that is not yet in oversold territory. This leaves room for additional downside before a more notable corrective rebound becomes likely.

On the downside, the first notable support lies at 1.1475, aligned with the lower Bollinger band. A break below this level would open the door to the July 13 low at 1.1377, followed by the June 24 trough at 1.1324.

On the upside, initial resistance is defined by the 100-day moving average at 1.1550. Above that, the next level to monitor is the Bollinger middle band around 1.1595. A sustained move above these barriers would be required to alleviate the current bearish bias and bring the upper Bollinger band near 1.1712 into focus.