Fundamental Analysis

The Federal Reserve raised interest rates on Wednesday, 16 September, by 25 basis points to a range of 3.75%–4%, its first hike since 2023 and after five consecutive meetings on hold. The decision came by a unanimous vote of all twelve members, following a clear split at the July meeting. The statement affirmed that inflation "remains elevated" and that the action taken "will support the return of inflation to the Committee's 2% objective sooner", wording notably more hawkish than its predecessor, after the removal of the reference to supply and energy shocks as an explanation for price pressures.

At the press conference, Fed Chair Kevin Warsh stressed that the primary focus is on price stability, describing inflation as far too high and persistent at this level for far too long, and noting that inflation risks are tilted to the upside while labour-market risks appear balanced.

The most significant element for markets, however, came from the dot plot: the median projection for the policy rate at end-2026 rose to 4.1% from 3.8% in the June forecasts, implying one additional quarter-point hike over the remainder of the year, with 16 of 18 officials projecting at least one hike and four projecting two. Projections also point to core inflation reaching 3.4% in 2026 and 2.5% next year, with unemployment steady at 4.1%.

This fed through to pricing immediately: the CME FedWatch tool now shows a probability of close to 90% for an additional 25-basis-point hike before year-end, the two-year Treasury yield rose 6 basis points to 4.73%, and the dollar index climbed to 100.33, its highest level since 31 July, while US equities declined. With the ECB's deposit rate still at 2.50%, the yield differential continues to widen in the dollar's favour, pushing EUR/USD to trade near its lowest levels in seven weeks.

Technical Analysis

Figure: EUR/USD, H4, TradingViewFigure: EUR/USD, H4, TradingView

EUR/USD is trading within a downtrend on the 4-hour timeframe, forming a series of lower highs and lower lows, following its break of the ascending structure marked by the two black lines. In the most recent leg, price broke the prior low at 1.15231 and printed a new lower low at 1.14544, confirming that bearish momentum remains intact.

Applying the Fibonacci retracement tool from the last lower high (marked by the red arrow) to the last lower low (marked by the green arrow), price may see a corrective rebound toward the supply zone highlighted by the red rectangle, which coincides with the 78.6% Fibonacci level at 1.15402 and the 88% level at 1.15505. This zone is a candidate area for price to meet negative pressure that returns it to the downtrend, should bearish momentum persist.

The key resistance to watch is the 1.15636 level, which represents the last higher low formed. As long as price continues to trade below this level without printing a new high above it, the bearish scenario remains the more likely one. A close above 1.15636 would weaken this scenario and open the door to a broader corrective advance.