EUR/USD Slips Beneath 1.1560 Support as FOMC Decision Looms

FUNDAMENTAL OVERVIEW

USD:

On Friday, the US dollar declined even though the monthly core inflation reading came in above expectations. That response was unusual because the data strengthened expectations for a Fed rate increase, with market participants now seeing a 93% probability of a hike at the next meeting. Meanwhile, rising oil prices are adding to inflationary pressures, and with no end in sight, this could push the Fed toward an even more hawkish stance going forward. The initial odd move eventually reversed, and the greenback climbed to a fresh weekly high.

The spotlight now shifts to the FOMC decision scheduled for tomorrow, where the Fed is anticipated to raise rates by 25 basis points. If implemented, that would mark the first rate increase since 2023. Market participants will be watchful for any hawkish surprises, as such outcomes could significantly strengthen the US dollar by prompting a more hawkish repricing of interest rate projections.

Another key area of attention is the situation in the Middle East, where ongoing oil price increases are stoking inflation worries as disruptions and supply anxieties worsen. Recently, oil prices have been the primary force moving markets; therefore, any reduction in tensions in the Middle East might drive oil prices down and result in a dovish repricing, which would likely put downward pressure on the US dollar.

At present, the fundamentals appear more favorable for the dollar, and a shift would probably require either a de-escalation in the Middle East or a dovish turn from the Fed.

EUR:

For the euro side, the European Central Bank raised rates by 25 basis points last Thursday, bringing the deposit rate to 2.50%, which was in line with market expectations. The more hawkish signal came from the updated inflation outlook, with the ECB expressing growing concern that the energy shock originating from the Middle East might keep price pressures elevated for an extended period. The central bank now projects headline inflation at 3.0% in 2026 and 2.5% in 2027, and has revised up both the 2027 and 2028 inflation forecasts.

Alongside the rate decision, the ECB also provided a more upbeat growth assessment, raising its 2026 and 2027 growth projections because the eurozone economy has shown greater resilience than anticipated. That provides policymakers with a bit more leeway to continue tightening monetary policy even amid the inflation shock.

The key development, however, came after the decision. According to ECB sources, policymakers are already talking about another rate increase as soon as the October meeting, contingent on energy prices staying high and inflation risks continuing to spread. That has lifted expectations for an October hike, with markets now pricing in a 66% probability. ECB President Lagarde did not commit to an October move, however, emphasizing a data-dependent and meeting-by-meeting approach.

EURUSD TECHNICAL ANALYSIS – DAILY TIMEFRAME

EUR/USD breached the important 1.1560 support level and then leveled off near the lower boundary of a descending channel. If a pullback occurs to the upper boundary of the channel, sellers are likely to enter there with a defined risk above that upper bound, positioning for a decline to 1.1400 support. Conversely, buyers will need to see a break higher to increase bullish positions, targeting the 1.1711 level next.

EURUSD TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME

A downward trendline on the four-hour timeframe outlines the bearish momentum. During any pullback, sellers are expected to use that trendline as a resistance, with a defined risk above it, to continue aiming for fresh lows. Buyers, meanwhile, will seek a break above the trendline to enter positions for a move toward the upper bound of the channel.

EURUSD TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME

For the 1-hour timeframe, sellers have a better risk-reward setup around the downward trendline, while buyers need a breakout above it to gain conviction for further gains.

UPCOMING CATALYSTS

The FOMC rate decision is scheduled for tomorrow. Thursday brings the US Jobless Claims data. Market participants will also monitor Middle East developments closely.