EUR/USD bias remains bearish as focus turns to Trump-Gulf meeting

Macro Overview

USD

The greenback strengthened broadly on Wednesday after the FOMC decision, which the market viewed as more hawkish than anticipated. As unanimously expected, the Federal Reserve raised its policy rate by 25 basis points. The statement also dropped the line that inflation remained elevated partly due to supply shocks. The Summary of Economic Projections showed upgraded forecasts for growth and inflation, while the unemployment outlook was lowered.

The dot plot was the key element: the Fed signaled only one additional rate increase in 2026, with rates staying high through 2027 before cuts begin in 2028. That projection was more dovish than what the market had priced in, which expected one hike in 2026 and two more in 2027.

The Fed appears to have little appetite for an extended tightening cycle. Chair Warsh largely repeated the remarks from his Jackson Hole speech, yet the market still perceived him as more hawkish. The reason is unclear.

Market expectations for an October rate hike moved forward, with the probability rising to 57%. This may be because Warsh said the Fed wants to see a timelier return to the 2% inflation target.

Going forward, the Middle East situation warrants attention. With oil at $100, rate hikes and elevated bond yields could increase pressure on Trump to end the war. There may already be a de-escalation phase beginning: Trump has called a meeting with Gulf leaders on Tuesday on the sidelines of the UN General Assembly in New York to discuss next steps in the conflict with Iran. Notably, the Iranian delegation will be allowed to participate. A de-escalation would push oil prices down, easing inflation and rate-hike concerns, ultimately weakening the dollar.

Economic data will also be crucial. When positioning and market expectations are stretched, even a small data surprise can cause a significant reversal. If US data starts to disappoint, expectations for aggressive rate hikes will likely diminish, and USD longs could be quickly unwound.

EUR

On the euro side, the ECB raised rates by 25 basis points last Thursday, bringing the deposit rate to 2.50% as broadly anticipated. The more hawkish element was the updated inflation outlook, with the ECB expressing greater concern that the energy shock from the Middle East could keep price pressures elevated for longer. The ECB now forecasts headline inflation at 3.0% in 2026 and 2.5% in 2027, with both the 2027 and 2028 inflation projections revised upward.

The decision also included a stronger growth assessment: the ECB upgraded its 2026 and 2027 growth forecasts, reflecting the euro-area economy's greater-than-expected resilience. This gives policymakers additional room to continue tightening despite the inflation shock.

The most significant development came after the decision. ECB sources revealed that policymakers are already discussing another hike as early as the October meeting if energy prices stay high and inflation risks continue to broaden. Lagarde, however, did not commit to October, emphasizing a data-dependent, meeting-by-meeting approach. Traders will therefore continue to watch data and the Middle East situation closely.

EURUSD Technical Analysis – Daily Timeframe

EURUSD broke below the key 1.1560 support level and extended losses to new lows after the FOMC decision. The sellers' natural target is the major support zone near 1.14. If the price reaches that area, buyers may step in with a defined risk below support, positioning for a rally to new highs. Sellers, meanwhile, will look for a break lower to increase bearish bets into new lows.

EURUSD Technical Analysis – 4 Hour Timeframe

A downward trendline on the four-hour chart defines the bearish momentum. On a pullback, sellers are likely to lean on the trendline with a defined risk above it, continuing to target new lows. Buyers, on the other hand, will seek a break above the trendline to enter for a rally toward the 1.1560 resistance.

EURUSD Technical Analysis – 1 Hour Timeframe

On the one-hour chart, sellers have a better risk-reward setup around the downward trendline, while buyers need a break above it to open the door for further upside. The red lines indicate the average daily range for today.

Upcoming Catalysts

On Tuesday, the Trump meeting with Gulf leaders is scheduled, and on Wednesday, flash Eurozone and US PMIs are due.