During the early trading hours in Asia on Wednesday, the EUR/USD pair falls to approximately 1.3335. The Euro has weakened against the US Dollar following dovish comments from European Central Bank President Christine Lagarde. Later on Wednesday, Germany’s retail sales data for August is expected to be released.
On Tuesday, Lagarde expressed concerns that rising bond yields could slow economic growth and restrict the impact of high energy prices on inflation. She suggested that the central bank should implement a “measured response” to control inflation, noting that there have not yet been any significant secondary effects.
Traders have adjusted their expectations regarding interest rate hikes and now see less than a 40% chance of the ECB raising rates in October, as per Bloomberg’s analysis.
Francesco Pesole, an FX Strategist at ING, commented, “Her comments affirm our belief that if a central bank is to raise rates in October, it will be the Fed and not the ECB.”
Meanwhile, in the US, the anticipation of further rate hikes from the Federal Reserve is supporting the Greenback. Traders are particularly focused on the US jobs report for September, set to be released on Friday.
Economists predict that the Nonfarm Payrolls (NFP) will reflect an increase of about 90,000 jobs in September, while the Unemployment Rate is expected to stay steady at 4.1%.
Currently, markets are pricing in nearly a 68% likelihood of a rate hike by the Fed in October and a 95% chance for December, according to the CME’s FedWatch Tool.
Euro remains stable as ECB lowers hike expectations for October
ING analysts observed that the Euro “held up relatively well yesterday despite the stream of dovish remarks from Lagarde,” noting that these comments “favored an increase in the SOFR-ESTR 2yr swap to beyond 155bp.” They pointed out that this spread is now close to the 163bp maximum width observed in early July, indicating a further shift in rate differences favoring the US.
According to ING, Lagarde appeared to downplay some of the market’s optimism about an October rate hike, arguing that “restrictive financial conditions are limiting the transfer of energy costs to the broader economy.” She emphasized that the ECB should respond cautiously, given the lack of evidence for second-round effects, reinforcing a more conservative policy outlook.
ING stated that her comments “confirm our suspicion that, if any central bank hikes in October, it will be the Fed and not the ECB,” with market pricing now at 17bp and 9bp, respectively. However, the macro team at ING believes both central banks may opt to wait until December, which underpins their outlook for a stronger EUR/USD by year-end.
Technical Analysis: EUR/USD outlook remains bearish below the 100-day SMA
According to daily chart analysis, the EUR/USD maintains a bearish short-term outlook, staying below the 100-day simple moving average (SMA) and the middle SMA of the 20-period Bollinger Bands. Prices are testing the lower end of the recent range, with the lower Bollinger band acting as nearby support. The Relative Strength Index (14) at 23.7 indicates an oversold condition, suggesting that while the downward momentum is pronounced, a reversal hasn’t occurred yet.
On the upside, initial resistance can be found at the Bollinger 20-period middle SMA around 1.1500, followed by the 100-day SMA near 1.1520. The upper Bollinger band is further up, around 1.1705, creating a larger supply zone should a corrective bounce take place. Conversely, immediate support is aligned with the Bollinger lower band at 1.1290. A decisive break below this could lead to further declines, while staying above it would maintain the pair in an oversold state under significant overhead resistance.
