- EUR/USD extends its uptrend to four-day highs past 1.1750.
- The US Dollar remained on the defensive on shutdown concerns.
- Investors now look at the upcoming ADP report and flash EMU CPI data.
The Euro (EUR) extended its rebound into Tuesday, with EUR/USD building on Monday’s positive tone and climbing back into the 1.1750–1.1760 area, its best levels in four days. The move keeps alive the recovery that started last week from a base near 1.1640.
The daily lift was largely a story of US Dollar (USD) weakness. Persistent fears of a looming US government shutdown weighed on the Greenback, alongside steady bets that the Federal Reserve (Fed) will deliver more interest rate cuts before year-end, while US Treasury yields slipped across maturities as a result.
The Fed is still searching for balance
On September 17, the Fed lowered rates by 25 basis points, acknowledging a softer labour market while stressing that inflation remains “somewhat elevated”.
The updated dot plot pointed to another 50 basis points of easing before year-end, with smaller reductions stretching into 2026 and 2027. The median policy rate for 2025 was set at 3.6%. Growth forecasts were nudged slightly higher to 1.6%, unemployment was kept at 4.5%, and inflation projections were left unchanged.
Not everyone agreed on the size of the move. Incoming governor Stephen Miran argued for a deeper half-point cut, though no other official sided with him.
In his post-meeting press conference, Chair Jerome Powell highlighted cooling job creation, weaker household spending, and inflation running at 2.7% on the headline PCE and 2.9% on the core. He attributed part of the stickiness to tariffs but noted that services inflation is easing. Powell described the balance of risks as “more balanced,” signalling the Fed is edging toward neutral rather than launching a full easing cycle.
When he spoke again on September 23 at the Greater Providence Chamber of Commerce, Powell admitted the Fed is in a “challenging ”situation”: inflation could flare up again even as slower job growth pressures the labour market.
ECB holding steady for now
The European Central Bank (ECB) kept rates unchanged earlier this month and reiterated its meeting-by-meeting approach. Officials judged that inflation is broadly aligned with the 2% medium-term target, with core inflation projected to average 2.4% in 2025 before easing to 1.9% in 2026 and 1.8% in 2027.
President Christine Lagarde described policy as being in a “good place”, with risks on both sides appearing more balanced. She stressed that any future policy changes will depend on the data.
Trade tensions bubbling under the surface
Trade disputes remain part of the backdrop. Washington and Beijing agreed to a 90-day truce, cooling some of the friction, but hefty tariffs are still in place: the US maintains a 30% levy on Chinese imports, while China continues to apply a 10% duty on American goods.
Meanwhile, the US and EU recently struck a deal that saw Brussels lower tariffs on US industrial goods and open up more access for American agricultural and seafood products. In return, Washington imposed a 15% tariff on most EU imports. Still, auto tariffs remain unresolved and could resurface at any point.
Positioning turns cautious
Speculators have been paring back bullish bets on the Euro. Commodity Futures Trading Commission (CFTC) data for the week ending September 23 showed net longs falling to around 114.3K contracts, the lowest since July. At the same time, institutional net shorts narrowed to about 165.8K contracts, or multi-week lows. In addition, open interest climbed to a two-week high of about 859.2K contracts.
Technical picture
The pair’s bull run entered its third day in a row, with the immediate target emerging at the 1.1800 round figure.
The continuation of the recovery should meet the next resistance of relevance at the pair’s YTD ceiling of 1.1918 (September 17). Extra gains from here should refocus on the psychological 1.2000 level.
On the flip side, the occasional bouts of weakness face provisional contention at the 100-day Simple Moving Average (SMA) at 1.1600, just ahead of the weekly low at 1.1574 (August 27) and the August valley at 1.1391 (August 1).
Momentum indicators now appear mixed: the Relative Strength Index (RSI) is above 53, which means that buyers are now regaining further balance. The Average Directional Index (ADX), on the other hand, is hovering around 14, which means that the overall trend remains colourless.
EUR/USD daily chart
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What could drive the next leg?
The pair may have room to extend higher in the near term, but a durable breakout likely needs a catalyst: perhaps a dovish surprise from the Fed, reduced appetite for US assets, tangible progress on trade disputes, or clearer signals that the ECB is comfortable staying on hold.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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