At first glance, the sharp decline in expectations for a Fed rate hike in October should have triggered a correction in the EUR/USD pair. However, the strength of the US economy has made it difficult for the bears to regain control. Let’s take a closer look at the current market situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The odds of a Fed rate hike in October have plummeted.
- Revised US GDP data helped the US dollar.
- The collapse in oil prices may not reduce Treasury yields.
- Short positions on the EUR/USD pair can be opened with targets of 1.1300 and 1.1200.
Weekly Fundamental Forecast for Dollar
The Fed is expected to tighten monetary policy at a faster pace than the ECB, while higher yields continue to make US assets more attractive than their European counterparts. The US economy also remains stronger than that of the eurozone. Together, these factors have pushed the EUR/USD pair toward 16-month lows. At the same time, investors’ doubts about the effectiveness of the Fed’s tightening cycle have done little to weaken bearish sentiment.
To say that a speech by New York Fed President John Williams caused a stir in financial markets would be an understatement. Expectations for a Fed rate hike plunged overnight, with the probability falling from 73% to 38%. Under different circumstances, such a sharp shift could have triggered an upward rebound in the EUR/USD. That is exactly how the market initially reacted. However, a series of subsequent macroeconomic data releases quickly brought the overly confident bulls back down to earth.
Likelihood of One and Two Fed Rate Hikes
Source: Wall Street Journal.
The upward revision of US GDP growth for the second quarter, from 1.6% to 2.2%, together with the acceleration of the PCE index to 0.3% m/m in August, has reinforced the view that the US economy continues to operate at close to full capacity. In other words, even if oil prices decline as energy supplies from the Middle East recover, US Treasury yields could remain near their 24-year highs. Their relative attractiveness could encourage capital to flow from Europe into the US, supporting the downward trend in the EUR/USD.
Capital outflows from Europe are further compounded by France’s looming political and fiscal challenges. France is scheduled to hold presidential and legislative elections in 2027, and rising support for leading political figures such as Marine Le Pen and Jean-Luc Mélenchon could put additional upward pressure on French government bond yields. Neither the right nor the left is advocating significant austerity measures, while the economic slowdown could push the budget deficit from 5.1% to 5.4% of GDP. The latest budget proposal is likely to trigger another confrontation between parliament and the government in the coming days, potentially increasing the risk of the prime minister’s resignation.
France-Germany Yield Spread
Source: Bloomberg.
September’s inflation data from Europe did little to support the euro. Spain recorded its fastest inflation rate in more than three years, with consumer prices rising to 5%—more than twice the ECB’s 2% target. In Italy, inflation reached its highest level since 2023, while France recorded its highest rate since 2024. Eurozone CPI is expected to accelerate to 3.7%, which, in theory, should strengthen the case for the ECB to maintain a tighter monetary policy stance.
Weekly Trading Plan for EUR/USD
In fact, the probability of a deposit rate hike in October has fallen from 31% to 22%. The ECB is likely to factor in political risks and adopt a “do no harm” approach as bond yields rise, putting additional pressure on the euro. The pullback in the EUR/USD pair has created an opportunity to add to short positions, with the previously identified targets at 1.1300 and 1.1200 remaining in focus.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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