EUR/USD Climbs to 1.1606 in a 3rd Straight Advance as September Fed Hike Odds Fall to 25%

EUR/USD extended its advance for a third consecutive session on Monday, gathering strength to around 1.1575 during early Asian hours before pushing to 1.1606, a gain of 0.32%. That move lifted spot to a two-month high and cleared the August peak at 1.1581 that had capped the pair through the first half of the month. The euro built the move on last week's bounce from the vicinity of the 1.1500 psychological level and attracted follow-through buyers at each attempt higher.

The dollar supplied the entire impulse. The US Dollar Index languished near the lower end of its monthly range, printing 99.49 before sliding to 99.363, down 0.20%. A Bloomberg gauge of the currency slipped 0.1% toward a third straight decline and levels last seen in May. That places the index below the 99.40 floor of the range it has held through August, converting former support into resistance and opening the path toward the 98 handle.

Broad dollar weakness rather than euro-specific strength describes the session. GBP/USD attracted dip-buyers and climbed above the mid-1.3500s to 1.3564, up 0.23%, moving closer to the three-month high touched Friday. The prevalent dollar selling bias favours bullish traders across the majors, and MSCI's emerging-market currency index hit an intraday record led by the Taiwanese dollar and Thai baht. When every major and emerging currency advances simultaneously, the driver sits on the dollar side of the quote.

Monday's calendar offered nothing to trade. No significant Eurozone or US releases were scheduled beyond the Empire State Index at 8:30 a.m. Eastern Time, which leaves volatility thin and momentum in control. That vacuum matters for interpretation: a two-month high achieved on an empty calendar reflects positioning adjustment carried over from Friday's data rather than fresh information, and positioning-driven moves on thin calendars tend to require confirmation from the following week's releases to hold.

Three Straight Sessions of Gains Off the 1.1500 Bounce

The current leg began at the 1.1500 psychological mark, and the sequence of higher lows since then defines the structure. EUR/USD resumed its upward movement on Friday, August 14, with the dollar shedding approximately 50 to 60 pips through the session and continuing to slide slowly. That advance followed a break above the 1.1535 to 1.1516 resistance band, which had capped the pair through the prior week.

The technical significance runs deeper than a three-day rally. EUR/USD has left the sideways channel at 1.1362 to 1.1461 after roughly a month of range-bound trading and now sits in an upward trend on the daily timeframe. A month of consolidation resolved to the upside is a materially different setup than a bounce within a range, and it changes the burden of proof from the bulls to the bears.

Recent history establishes the base. The pair traded from a low of 1.1355 on June 24 to current levels, an advance of roughly 2.2%, and stabilised near 1.1400 following June's decline before building the current structure. The June low remains the reference point for any bearish reversal, and it sits 2.1% below spot. That distance frames the risk-reward for anyone positioning against the current move.

The euro's advance remains vulnerable despite the technical improvement. The pair reached four-week highs above 1.1580 as fading expectations of a September Federal Reserve hike weighed on the dollar, but that gain rests on US data rather than European strength. Nothing in the eurozone picture improved over the past week. Growth projections remain at 0.8%, energy costs continue to press on the region's outlook, and the currency is rallying because its counterpart weakened. Rallies built on the other side of the quote unwind quickly when that side reverses.

The 1.1600 Round Number and the 1.1641 to 1.1612 Trend Boundary

The resistance structure immediately above spot is dense and each level carries a specific function. The first hurdle is the 1.1600 round figure, which bulls await a move beyond before placing fresh bets. Above that sits a target zone at 1.1601 to 1.1576 that has now been tested, and beyond it a trend boundary at 1.1641 to 1.1612 where the current upward correction is projected to terminate.

Higher still, two clusters define the extension case. The first sits at 1.1657 to 1.1666, reachable if the pair consolidates above 1.1585. The second is a zone at 1.1668 to 1.1660 that functions as the next objective once the trend boundary clears. Above both, 1.1680 has been identified as the level at which the pair's structure shifts from corrective to constructive, and a stop-loss placement at 1.1685 marks where the bearish case invalidates entirely.

The distinction between 1.1600 and 1.1680 is the whole question. Clearing 1.1600 confirms the break of the August peak and extends a corrective bounce. Clearing 1.1680 changes the character of the move, because it would place EUR/USD above the zone where the pair failed after its last attempt from the 1.1780 to 1.1810 area. A corrective bounce that terminates at 1.1641 leaves the broader downtrend from 1.2070 intact. One that clears 1.1685 does not.

Tactical positioning splits at 1.1585. Consolidation above that level permits long positions targeting 1.1657 to 1.1666. A bounce lower off 1.1585 permits shorts targeting 1.1536 to 1.1542. Separately, the trend boundary at 1.1641 to 1.1612 is identified as a selling zone with a first target at 1.1482 and a second near the June low of 1.1324. Those two frameworks are not contradictory; they describe the same market at different scales, with the intraday bias higher inside a structure that still favours mean reversion once the upper boundary is reached.

Support Runs From 1.1535 Down to the June Low at 1.1355

The downside ladder is layered and each rung has been tested within the past six weeks. The first support is the 1.1535 to 1.1516 band the pair broke above on Friday, which now functions as the pivot separating the bullish and bearish cases. A return below it would open shorts targeting 1.1429 and then 1.1324. Beneath that sits support at 1.1508 to 1.1500, the psychological level from which the current leg originated.

Deeper support sits at 1.1466 to 1.1453, and beneath it the 1.1482 level identified as the first downside target from the trend boundary. The old sideways channel at 1.1362 to 1.1461 supplies the next zone, and a return inside it would invalidate the breakout that established the current uptrend. The floor of that structure is the June 24 low at 1.1355, with 1.1324 marking the extension objective below it.

The gap between spot at 1.1606 and the June low at 1.1355 measures 251 pips, or 2.2% of price. That is the full extent of the downside available before the pair would revisit the cycle base, and it frames why the current move carries limited asymmetry from a mean-reversion standpoint. A trader positioning short at the 1.1641 boundary risks 44 pips to 1.1685 against a 159-pip first target at 1.1482, which is the arithmetic behind the prevailing sell-the-rally framework.

The 1.1500 level deserves particular weight because it functioned as the launch point rather than merely a technical marker. The pair built on its bounce from that vicinity across three sessions, which establishes it as accepted support rather than an untested line. Support that has produced an actual reversal carries more predictive value than support derived from a moving average or a Fibonacci retracement, and 1.1500 is the only level in the lower structure that qualifies on those terms.

RSI at 63 and the Upper Bollinger Band Cap the Advance

Momentum indicators confirm the direction while flagging the constraint. On the daily chart, EUR/USD holds above the 100-day simple moving average and the Bollinger Bands middle line, keeping the near-term bias constructive as the pair grinds higher within the upper half of its recent range. The Relative Strength Index at 63 signals firm upward momentum without reaching the overbought threshold at 70.

The upper Bollinger band is the operative resistance. Spot remains capped by it, which is the technical expression of the same problem the level structure describes: the pair has momentum but no room. An RSI at 63 with price pinned against the upper band typically resolves in one of two ways, either through a volatility expansion that carries price and band higher together, or through a consolidation that allows the band to widen while price holds. The first requires a catalyst. Monday's empty calendar supplied none.

Position relative to the moving averages establishes the structural read. Holding above the 100-day places the pair above its intermediate trend measure, and recent readings showed EUR/USD sitting near its 8-day, 21-day, 50-day and 100-day exponential averages simultaneously. Averages compressed at the same level describe a market at an inflection rather than in a trend, and the break above that cluster is what generated the current three-day advance.

The 200-day average is the next reference for the bull case, with at least one bank looking for further gains toward it. Clearing the 200-day would place EUR/USD above every major trend measure and complete the transition the 1.1680 level marks in price terms. Until then, the indicator picture describes a technically improving pair inside a structurally intact downtrend, which is precisely the configuration that produces the failed breakouts EUR/USD has delivered repeatedly since the second quarter.

The Dollar's Cycle: 1.2070 to 1.1350 and Halfway Back

The longer arc matters more than the three-day move. During the first half of 2026, the US dollar appreciated against the euro from 1.2070 to 1.1350, a decline of roughly 6% in the pair. EUR/USD at 1.1606 sits considerably closer to that cycle low than to its high, which is the observation underpinning the most bullish forecasts on the pair.

The mechanism that drove the dollar's strength has changed character. Middle East geopolitics clouded forecasts through the first half, with the conflict driving oil higher, lifting US inflation expectations and pushing the Fed toward tightening while simultaneously damaging European growth through energy costs. That combination was unambiguously dollar-positive. The factor no longer supports the dollar in the same way, because the same oil shock that raised US hike odds has now been offset by a contracting US consumer.

That shift is the analytical core of the current move. Two weeks ago, money markets carried 22 basis points of Federal Reserve tightening by the end of 2026, up from 17 basis points, and that five-basis-point shift occurred without new inflation data, driven entirely by crude moving toward $83. The dollar had become tightly coupled to the energy complex through the rate channel. Friday's retail sales print broke that coupling by introducing a demand-side constraint that oil prices cannot offset.

Forecasts extrapolating from the cycle position are aggressive. One framework anticipates a return to 1.2070 by the end of the current year, which would require a 4% advance from spot. Against that, the dollar index at 99.826 refused to trend through either an oil shock or a contracting labour market across the prior month, and it printed 99.363 on Monday. A currency that will not break down under two opposing shocks is range-bound rather than trending, and 99.363 sits at the bottom of that range rather than beneath it.

Fed Hike Odds Collapse After July Retail Sales Fall 0.6%

The data that produced the euro's advance was unambiguous. The US Census Bureau reported retail sales fell 0.6% in July, the biggest monthly decline since May of last year, against consensus for a 0.1% gain and reversing June's 0.2% increase. Excluding autos, sales fell 0.3% against expectations for a 0.2% gain. The University of Michigan preliminary August sentiment index fell to 51 against forecasts of 55.

The repricing followed immediately. Markets now place the probability of a September Federal Reserve increase at roughly 25% on swaps pricing, with other measures near 30%, down from approximately 50% a week earlier and from a peak near 70% earlier in August. CME pricing had placed September hold odds at 53.9% before the data, which means the shift moved hold probability from a coin flip to a strong base case in a single session. Treasuries rose across the curve.

The direction of this cycle's Fed debate is the crucial context. The federal funds target range sits at 3.50% to 3.75%, held since December, following a 9-3 July vote in which Cleveland's Beth Hammack, Minneapolis' Neel Kashkari and Dallas' Lorie Logan all dissented in favour of a 25-basis-point increase. Inflation has exceeded the 2% objective for more than five years. This is a market pricing the probability of tightening, not easing, which inverts the usual dollar-negative interpretation of soft data.

Chair Kevin Warsh, who took office May 13, has removed forward guidance from the post-meeting statement and stated there is no soft implicit target on this committee's watch. He added that five-plus years of above-target inflation cannot be cured in nine weeks or by a single month of modest price decreases. A chair who refuses to signal forces markets to trade every print at full weight, which explains why a 70-basis-point retail sales miss moved September pricing by more than 25 percentage points and carried EUR/USD 100 pips higher across three sessions.

The 137.5-Basis-Point Policy Gap and the Bund-Treasury Spread

The rate differential remains the structural argument against the euro, and it has barely moved. The Federal Reserve's target range midpoint sits at 3.625% against the ECB deposit facility rate at 2.25%, a policy gap of 137.5 basis points in the dollar's favour. That gap has persisted through the entire dollar range and represents the carry cost of holding a long euro position.

Sovereign spreads tell the same story. The US 10-year Treasury yields 4.695% against the German 10-year at 3.1954%, a spread of roughly 150 basis points. The US 30-year sits at 5.267%, the five-year at 4.362% and the three-month bill at 3.79%, while the Euro Bund traded 124.32. The 10-2 year US spread widened to 31.32 basis points, up 15.27% in a single session, implying a two-year near 4.382%.

The composition of the US curve move complicates the euro case. Front-end yields are falling on soft consumer data while the long end holds, supported by higher oil prices, elevated fiscal deficits and capital demand from the artificial intelligence investment boom. A steepening curve compresses the short-dated carry advantage that most FX positioning references while leaving the long-dated differential intact. EUR/USD trades primarily off two-year spreads, which is why the pair advanced, but the 150-basis-point ten-year gap caps how far that advance can run.

Narrowing the Bund-Treasury spread is the specific condition the euro requires. A cool US print moves September hold odds above 60%, compresses the priced Fed tightening, pulls the 10-year back from its current level and narrows the spread, which clears 1.1600 and targets 1.1680 with the structure shifting from corrective to constructive above that level. A hot core print inverts it. Friday delivered the first half of that sequence through retail sales rather than inflation, and the pair responded exactly as the framework anticipated by clearing 1.1600 and stalling beneath 1.1680.

ECB Holds at 2.25% With a September Hike Near 78% Priced

The European Central Bank is the only major central bank with a fully priced tightening move ahead of it, and that asymmetry is the euro's strongest fundamental support. The ECB raised its deposit facility rate to 2.25% effective June 17, 2026, its first increase since 2023, alongside the main refinancing rate at 2.40% and the marginal lending facility at 2.65%. The Governing Council cited inflation pressures generated by the Middle East war.

The July 23 meeting delivered a hold across all three rates with no fresh projections, framed as a hawkish-leaning pause that left the door open for September action. Markets had priced better than 99% probability of no change, making Lagarde's press conference the entire signal. The pause came only six weeks after the first hike in nearly three years, giving policymakers time to assess its effects.

September pricing is decisive. The Governing Council meets on September 10, with markets pricing close to 78% odds of a 25-basis-point increase to 2.50%, up from roughly 70% in early July. One bank expected the July decision to be unanimous with a hawkish tone consistent with a further September hike being highly probable. If August inflation data confirms the upward trend, a move to 2.50% is the base case.

The contrast with Federal Reserve pricing is the entire euro trade. Markets assign roughly 25% probability to a Fed hike in September and roughly 78% to an ECB hike. A realised ECB increase alongside a Fed hold would compress the policy gap from 137.5 basis points to 112.5, a 25-basis-point narrowing that represents the largest single-step convergence available this year. That prospective compression, rather than any improvement in eurozone growth, is what supports EUR/USD at these levels. The risk is symmetrical: a September ECB hold alongside a Fed hike would widen the gap to 162.5 basis points and send the pair back toward the June low.

Eurozone Inflation at 2.9% and the Energy Second-Round Problem

The inflation data underpinning ECB hawkishness has turned higher again, which strengthens the September case. Euro area annual inflation reached 2.9% in July from 2.8% in June. That June reading had marked the first deceleration of the year, down from May's 3.2%, with core price increases moderating to 2.4%. July's reversal, driven by energy, restores the upward trajectory the ECB was hoping had ended.

Official projections set the bar. The June Eurosystem staff baseline expects headline inflation to average 3.0% in 2026, easing to 2.3% in 2027 and 2.0% in 2028, with inflation excluding energy and food averaging 2.5% in 2026 and 2027 before 2.2% in 2028. A 2.9% July print sits close to that 3.0% full-year path, which removes any argument that inflation is undershooting the forecast that justified June's hike.

Lagarde's characterisation of the policy stance is the most hawkish element. She emphasised that the June increase was not an insurance hike but a reaction to a genuine inflation challenge, with forecasts indicating a return to the 2% target only by late 2027 and only if monetary policy becomes more restrictive. That conditional is explicit: the ECB's own baseline requires further tightening to reach target. She declined to outline a predetermined course and noted that forward guidance is not under consideration.

The transmission mechanism she flagged is the operative risk. Lagarde warned that the longer energy prices remain elevated, the more likely they are to drive up broader inflation through indirect and second-round effects. The ECB noted the energy price outlook remains broadly in line with June projections despite continued volatility, while warning that uncertainty remains high and the full inflationary impact of the shock has yet to emerge. An inflation problem that has not fully arrived is one a central bank tightens against pre-emptively, which is why the 78% September pricing has proved durable through weeks of soft global data. Growth projections of 0.8% supply the counterargument, and the tension between 2.9% inflation and 0.8% growth is the definition of a stagflationary policy bind.

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