Figure: EURUSD, H4, Trading ViewFigure: EURUSD, H4, Trading View

The European Central Bank raised interest rates on 10 September by 25 basis points, bringing the deposit facility rate to 2.50% and the main refinancing operations rate to 2.65%, while stressing that geopolitical tensions continue to fuel inflationary pressures and that inflation will remain well above the 2% target for an extended period. ECB President Christine Lagarde described the decision as "a no-brainer," noting that it was taken unanimously.

Despite this hawkish tone, the euro gained little from it, as the market had already priced the hike in, and the interest rate differential still tilts clearly in the dollar's favor.

On the US side, August inflation data (released on 11 September) came in supportive of the dollar: the headline index rose 0.4% month-on-month versus 0.1% in July, while the core index advanced 0.3% month-on-month, above market expectations of 0.2%, taking annual inflation to 3.4%, driven by a surge in energy costs of 28% year-on-year for fuel.

This reading strengthened expectations of a US rate hike. Markets are now pricing the probability of the Fed beginning a hiking cycle with a quarter-point move at close to 70% at its meeting on 15–16 September, starting from the current range of 3.50%–3.75%, a meeting that also comes with updated economic projections and the dot plot.

The rate differential between the Fed (3.50%–3.75%) and the ECB (2.50%) continues to work in the dollar's favor, while higher oil prices hurt the eurozone, a net energy importer, more than they hurt the US economy. Any hawkish tone from the Fed this week could push the pair lower still, whereas a hold accompanied by a neutral tone could give the euro a corrective rebound toward the resistance areas outlined below.

Technical Analysis

EUR/USD is trading within a downward move on the 4-hour timeframe, forming a series of lower highs and lower lows. In the most recent leg, price broke the previous low and printed a new low below 1.15663, at 1.15515, confirming the continuation of bearish momentum.

By 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 retracement toward the supply area marked by the red rectangle, which coincides with the 78.6% Fibonacci level at 1.16309 and the 88% level at 1.16412. This area is a candidate for price to be met with selling pressure that returns it to the downward trend, should bearish momentum remain intact.

The key resistance to watch is the 1.16543 level, which represents the last lower high formed. As long as price remains below this level without printing a new high above it, the bearish scenario remains the more likely one. A close above 1.16543, however, would weaken this scenario and open the way for a broader corrective move higher.