Fed Gives Euro Brief Relief Before ECB

EUR/USD is trading around 1.1135 after the euro initially strengthened following the Federal Reserve meeting. The Fed kept rates unchanged, while Chair Kevin Warsh’s comments were interpreted as slightly softer than expected. However, the probability of a December rate hike remains high, and attention now shifts fully to today’s ECB decision.

3 Takeaways

• The Fed kept rates unchanged in a 10–2 vote, with only two members supporting a hike.

• Markets are pricing in roughly a 78% probability of a December rate increase.

• The ECB is also expected to leave rates unchanged today, making Christine Lagarde’s guidance the key focus.

The dollar initially weakened after the Fed decision, while the euro gained around 0.3%. However, EUR/USD later pulled back toward 1.1134, while the dollar index stabilised near 102.26.

The main dovish signal came from the lack of a clear indication that the Fed intends to raise rates in December. Warsh said the economy was moving in the right direction and did not appear to be overheating, while the 2-year Treasury yield fell noticeably after the press conference.

Main macroeconomic driver

Attention now shifts to Europe.

The ECB is expected to keep borrowing costs unchanged, but the policy backdrop remains difficult. Higher oil and gas prices are reviving inflation risks, while weak growth and France’s fiscal problems limit the room for aggressive tightening.

European gas prices briefly climbed toward €100 per MWh this week, the highest level since December 2022, while storage levels stand at around 75% compared with 83% a year ago. This increases the likelihood of relatively hawkish ECB guidance even if rates remain unchanged.

Central banks

The Fed has effectively left December fully open. Markets still assign close to an 80% probability to another rate hike, but the next move will depend heavily on upcoming inflation and labour market data.

For the euro, the key issue today is the balance in Lagarde’s message. A hawkish signal on inflation could support EUR/USD, while a stronger focus on growth risks and France could quickly put the single currency back under pressure.

Technical outlook

EUR/USD remains just above the 1.1100–1.1120 support zone.

A break below this area would increase the risk of a move toward 1.1050. Initial resistance is located around 1.1160–1.1180, followed by 1.1200.

For a more meaningful recovery, the pair would need to establish itself above 1.1200.

FAQ

Why is the euro not rising more strongly after the Fed?

Because a December rate hike remains largely priced in, while European energy and fiscal risks continue to limit demand for the euro.

What matters most today?

The ECB decision and Christine Lagarde’s press conference.

Which levels are key?

Support is at 1.1100–1.1120. Resistance is at 1.1160–1.1200.