Euro looks vulnerable near yearly low as Fed-ECB policy takes centre stage

• Vulnerable ahead of the Fed’s policy announcement, the Euro hovers near its yearly low of 1.1113 against the US Dollar.
• Pressure on the Euro persists amid French fiscal risks and elevated oil prices.
• Interest rates are expected to remain unchanged at both the Fed and the ECB.

Under pressure from growing unease in French bond markets and higher oil prices, the Euro (EUR) remains near its yearly low of 1.1113 against the US Dollar (USD) in Wednesday’s European session. These concerns continue to weigh on the Euro, keeping the major currency pair on the defensive.

Can the Euro withstand wider French spreads as confidence revisits 2022 lows?

Domestic political tensions are becoming more evident in French markets, according to Scotiabank strategists, who note that “French bonds … underperforming, nudging the spread over 10Y bunds back up to 161bps.” Highlighting the sharp deterioration in sentiment, they add that “French Consumer Confidence plunged to 80 in October, equaling the low seen in 2022, reflecting recent pollical tensions and social unrest.”

Fears of further disruption to energy supplies have also gathered pace following a drone attack by Iran-backed Houthis on Saudi Arabia’s biggest oil facility, driving oil prices higher at a faster pace.

A military spokesperson for the Iran-aligned Houthis said on Tuesday that the group had struck Saudi Arabia’s biggest oil refinery with a missile, stepping up attacks on the world’s second-largest crude producer. According to Reuters, Saudi authorities did not immediately confirm the strike on the facility, which has a capacity of 550,000 barrels per day.

Attention for the Euro now turns to Thursday’s monetary policy announcement from the European Central Bank and Friday’s preliminary German Harmonized Index of Consumer Prices (HICP) figures for October. Both will be key triggers, with the ECB expected to leave interest rates unchanged.

For the US Dollar, the focus is on the Federal Reserve’s (Fed) monetary policy announcement, due at 18:00 GMT.

Will the Fed signal further tightening as Danske Bank forecasts December and March hikes?

For US markets, Danske Bank analysts identify “the main event of the week is this evening's FOMC rate decision and the following press conference,” adding that they “expect the Fed to keep policy rates unchanged, in line with consensus, while markets price in a 10% probability of a hike.”

Explaining why they “expect 2-3 dissenting votes in favour of a hike,” the bank’s analysts note that “most central FOMC members have signalled that they can wait until December before hiking again, although a few see more urgency,” supporting their expectation of some dissent.

Danske Bank maintains its assessment that it “still see[s] a need for further tightening”, while noting that “all eyes are on Fed, which are expected to leave rates unchanged.” The bank’s base case is for Chair Powell “to reiterate his firm commitment to bringing inflation back to target,” and it retains its forecast for “two more hikes, in December and March.”

EUR/USD Technical Analysis: Can Bearish Pressure Ease?

The daily chart retains a bearish bias for EUR/USD, which trades at 1.1126 below its 20-day exponential moving average (EMA) of 1.1228. This dynamic resistance continues to cap the pair and maintain downward pressure. A Relative Strength Index (RSI) reading near 30 also suggests that downside momentum remains in control. However, the approach towards oversold territory could temper near-term selling rather than bring about a reversal in the trend.

A daily close above the 20-day EMA, the first resistance around 1.1228, would be required to relieve the prevailing bearish pressure and indicate a more durable corrective rebound. Before that hurdle is cleared, any gains are likely to be treated as corrections within the broader downtrend. With no nearby structural support evident on the chart, renewed selling momentum could leave the pair exposed to fresh lows.

(The technical analysis of this story was written with the help of an AI tool. Know more.)