EUR/USD at a Crossroads as Fed and ECB Tighten

The EUR/USD exchange rate is at a critical juncture as both the Federal Reserve and European Central Bank continue to tighten monetary policy. The Fed raised its target range by 25 basis points to 3.75%-4.00% in September, marking its first increase since 2023, with Chair Kevin Warsh emphasizing the central bank's commitment to restoring price stability.

The ECB has also delivered two 25-basis-point hikes this year, lifting the deposit rate to 2.50%, as policymakers confront persistent inflation pressures and increasing risks to growth. The Fed's hawkish stance is bolstering the US dollar, while the ECB's response to inflation provides some fundamental support for the euro.

With both central banks leaving the door open to further action, the relative pace of tightening will be crucial for EUR/USD through Q4. Markets are pricing a 68% probability of another 25-basis-point Fed hike in October and a 93% probability of a December ECB hike that would lift the deposit rate to 2.75%. A deterioration in growth or moderation in energy-driven inflation could challenge these expectations.

The EUR/USD pair has reversed more than 3% from its August high, testing major support at 1.1355-94. The bulls need to stabilize this recent decline heading into the close of the year to avoid a deeper correction.