EUR/USD Price Holds Above 1.1700 as Fed Weakness and ECB Divergence Drive Price

EUR/USD Volatility Escalates on Diverging Fed and ECB Signals

The EUR/USD pair is holding near 1.1735 after a week dominated by conflicting signals between the Federal Reserve and the European Central Bank. The ECB left its deposit rate unchanged at 2.00% and Christine Lagarde stressed that “disinflation in Europe is over,” giving the euro a policy advantage against a Fed that is expected to cut rates as early as September 17. Traders have now reduced the odds of another ECB rate cut before spring to just 40%, while in the U.S. rate markets show a 94% chance of a 25 bps cut and even a 7% chance of a larger 50 bps move. The divergence has driven sharp swings in EUR/USD, with bulls repeatedly testing 1.1720–1.1750 resistance while bears remain active on pullbacks.

Labor Market Weakness Shifts Fed Outlook Toward Aggressive Cuts

The U.S. macro backdrop is weakening rapidly, keeping the dollar under pressure. Weekly jobless claims jumped to 263,000, well above consensus at 235,000, marking the highest level in four years. Nonfarm payrolls added just 22,000 jobs last month, while unemployment climbed to 4.3%. The Bureau of Labor Statistics revised down prior payroll data by 911,000 for the year ended March 31, a dramatic reassessment that underscores fragility in employment. Inflation remains sticky, with August CPI rising 0.4% MoM and 2.9% YoY, while core CPI printed 3.1%. For the Fed, the balance has shifted: inflation is elevated, but labor deterioration is harder to ignore, pushing policymakers closer to a rate-cut cycle that would weigh on the dollar against the euro.

ECB Holds Firm as Lagarde Signals Confidence in Eurozone Stability

While the Fed leans dovish, the ECB’s tone is hawkish. Lagarde highlighted that risks to growth have become more balanced, inflation is where the ECB wants it, and tariff pressures have eased after new trade deals. Policymakers argued that the bloc is in a “good place,” which lifted the euro. German CPI confirmed inflation at 2.2% YoY in August, in line with expectations but showing stability compared to U.S. volatility. Traders now see fewer chances of an ECB cut, adding strength to EUR/USD as relative policy paths diverge.

Technical Levels Keep EUR/USD Traders on Edge

On the charts, EUR/USD has repeatedly challenged 1.1720–1.1750 resistance. Earlier breakouts above this zone failed, sending the pair back into consolidation. However, bulls are pressing again, aided by support at 1.1704 and the 50-day EMA around 1.1712. The broader ascending channel from early September remains intact, with key higher support at 1.1670 and deeper protection at 1.1610. RSI sits near 61, not yet stretched, suggesting room for further gains if momentum builds. Resistance zones to watch are 1.1780–1.1790 and the three-year high at 1.1830, with the psychological 1.2000 figure looming as the longer-term target if bullish control strengthens.

Dollar Index Breaks Support as Euro Weight Dominates Basket

The U.S. Dollar Index (DXY) has slid to 97.5, falling below its rising channel support. The euro makes up 57.6% of the DXY basket, so the pair’s resilience has amplified dollar weakness. Technicals point bearish: the 50-day EMA at 97.75 and 200-day EMA at 97.96 now act as overhead resistance, while support lies at 97.33, followed by 97.10 and 96.38. The RSI at 37 suggests bearish momentum with oversold conditions approaching, limiting further downside in the short term. However, unless DXY recovers above 97.75, sellers remain in control and EUR/USD retains bullish bias.

Sentiment Data in Focus as Euro Tests Momentum

Investors now turn to the preliminary University of Michigan Consumer Sentiment Index, forecast at 58.0, slightly below August’s 58.2. Inflation expectations are projected at 4.8%. A weaker sentiment reading would add pressure on the Fed to act, potentially propelling EUR/USD higher. Markets also watch consumer surveys in Europe, with policymakers stressing resilience despite soft energy prices. The euro has held gains against the dollar, trading up 0.09% on the day, while outperforming against the yen and New Zealand dollar.

EUR/USD Trading Strategy Assessment

The setup for EUR/USD remains tilted bullish in the short term as long as 1.1704–1.1710 holds as support. The structure favors continuation toward 1.1780–1.1830 if buyers maintain control. A failure below 1.1670 would cancel the bullish view and open downside risk toward 1.1610. Given policy divergence between the ECB and Fed, with Europe signaling stability and the U.S. preparing cuts, EUR/USD carries a relative strength advantage into the coming week. Based on macro conditions, technical levels, and central bank divergence, the pair is best viewed as a Buy on dips, targeting resistance toward 1.1830 in the near term and potentially 1.2000 in the longer horizon.

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