EUR/USD remained on the defensive for the fourth consecutive day on Thursday, extending its weekly bearish tone and slipping back to the mid-1.1500s, or nine-week lows. The pair’s intense retracement comes in response to heightened political uncertainty in France, while the lack of any kind of progress to unlock the US shutdown also contributes to the broad-based weakness in the single currency.
Meanwhile, the US Dollar (USD) keeps its march north unabated, lifting the US Dollar Index (DXY) well past the 99.00 barrier to hit fresh two-month peaks, helped at the same time by the acceptable bounce in US Treasury yields across the spectrum.
French politics back in focus
French President Emmanuel Macron is expected to name a new prime minister within the next 48 hours, his office said on Wednesday. The move comes as France faces what many see as its most serious political crisis in decades, and with most lawmakers strongly against holding a snap parliamentary election.
Sebastien Lecornu, France’s fifth Prime Minister in just two years, resigned on Monday along with his entire cabinet, only hours after unveiling his line-up. His administration now goes down as the shortest-lived in modern French history, a stark reflection of the turbulence shaking Macron’s government.
Central banks tread carefully
Across the Atlantic, the Federal Reserve (Fed) cut rates by 25 basis points on September 17, acknowledging weaker labour data but noting that inflation remains “somewhat elevated.”
The updated dot plot leaned dovish, pointing to another 50 basis points of easing before year-end and smaller cuts through 2026–27. Growth forecasts nudged up to 1.6%, unemployment stayed at 4.5%, and inflation projections were unchanged.
Not everyone was on board, though. Incoming governor Stephen Miran pushed for a larger half-point cut but failed to sway the committee.
At his press conference, Chair Jerome Powell highlighted slower job creation and softer household spending, with headline PCE inflation at 2.7% and core at 2.9%. He noted that tariffs were keeping some prices sticky, even as services inflation eases, adding that the balance of risks now looks “more balanced”, a hint the Fed may be nearing neutral rather than embarking on a full easing cycle.
When Powell spoke again a few days later, he doubled down, warning that inflation could still flare up even as a weaker labour market weighs on growth.
The September FOMC minutes backed that message. Policymakers still see room for more cuts this year, though the tone was cautious. Most supported the quarter-point move, but several voiced concern about the pace of hiring and cooling price pressures, signs the Fed remains open to more easing if conditions worsen.
Meanwhile, the European Central Bank (ECB) left policy unchanged in September, sticking with its meeting-by-meeting approach. Officials said inflation is still on track to return to the 2% target over time. Core inflation is projected to average 2.4% in 2025 before easing to 1.9% in 2026 and 1.8% in 2027.
President Christine Lagarde repeated that policy is in a “good place” and that risks are broadly balanced, stressing that any future moves will depend entirely on incoming data.
According to the ECB’s September meeting Accounts, released on Thursday, policymakers remain in no hurry to cut rates again, even as they acknowledge the unusually high uncertainty and risks in the outlook. The bank struck a slightly more upbeat tone on the euro area economy, signalling that further easing would require a clear deterioration in conditions, despite lingering concerns over US tariffs.
Trade tensions linger
Trade remains a major wildcard. Washington and Beijing agreed to a 90-day truce that’s helped calm markets somewhat, but tariffs are still in place: 30% on Chinese imports to the US and 10% on US exports to China.
There’s also been some progress between Washington and Brussels. The US and EU reached a partial deal to lower EU tariffs on American industrial goods and expand access for US agricultural and seafood exports. In return, the US imposed a 15% tariff on most EU imports.
The big unresolved question remains autos, which still face the threat of fresh tariffs.
Caution creeping into EUR sentiment
Market positioning suggests traders are turning more cautious on the euro. With new Commodity Futures Trading Commission (CFTC) data delayed by the US government shutdown, the latest figures as of September 23 show net longs on the EUR falling to their lowest since July, around 114.3K contracts. Institutional net shorts narrowed slightly to about 165.8K contracts, while open interest climbed to a two-week high near 859.2K contracts.
Technical landscape
EUR/USD risks a deeper pullback, with sellers now in control and with the immediate target at the late July–early August lows in the 1.1400–1.1390 band.
That said, the continuation of the decline could put a test of the August base at 1.1391 (August 1) back in play, while the break below that region exposes a visit to the weekly trough at 1.1210 (May 29), which appears propped up by the critical 200-day SMA.
In contrast, bouts of strength should face immediate resistance at the October high at 1.1778 (October 1), just ahead of the 2025 ceiling of 1.1918 (September 17).
In the meantime, the constructive tone in the pair is expected to remain in place while it trades above the 200-day SMA at 1.1214.
Momentum indicators favour further losses in the near term: the Relative Strength Index (RSI) receded to around 35, opening the door to extra pullbacks. Additionally, the Average Directional Index (ADX) just above 14 suggests the trend remains weak for now.
EUR/USD daily chart
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Looking for a spark
EUR/USD might find room for a short-term rebound, but a clear catalyst is still missing. A dovish surprise from the Fed, softer demand for US assets, a patient ECB, or signs of progress on trade could all help shift sentiment and give the pair a lift.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
