Euro Edges Higher Amid Hawkish Fed Tone. Forecast as of 23.09.2025 | LiteFinance
Regardless of what FOMC officials say, the Fed will lower the federal funds rate. The ECB, on the other hand, has most likely ended its cycle of monetary expansion. The strong euro does not concern the ECB, which means that the EURUSD pair has room to grow. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Fed’s hawkish rhetoric does not threaten the EURUSD pair.
- The Fed will continue to cut rates, and the dollar will continue to fall.
- The ECB is not concerned about the euro’s strengthening against the greenback.
- Long trades can be increased if the EURUSD pair breaks through 1.1825.
Weekly US Dollar Fundamental Forecast
When faced with two evils, it is common to choose the lesser of the two. As difficult as it may be for Americans to tolerate high inflation, rising unemployment will hit them harder. With two-sided risks, the Fed has no risk-free options, and the central bank is forced to cut rates. The only question is how fast it will do so. The EURUSD pair is poised to rise, especially since the ECB’s monetary expansion cycle is most likely over.
Markets are gradually recovering after profit-taking on long trades in the major currency pair on the news of a federal funds rate cut in September. Investors are starting to do what they usually do in conditions of monetary policy divergence—buy the EURUSD pair on news that is good for bears, such as moderately hawkish rhetoric from FOMC members. When Alberto Musalem calls for caution, Beth Hammack expresses concerns about inflation, and Raphael Bostic raises doubts about monetary policy easing in October, it is high time to sell the US dollar.
US Inflation Change
Source: Bloomberg.
Despite the potential acceleration of PCE to 2.9%, the Fed considers such inflation trends to be transient. The potential explosive growth in unemployment poses a much greater danger. The derivatives market gives only a 10% probability that the federal funds rate will remain at 4.25% following the next FOMC meeting. Goldman Sachs forecasts two cuts in 2025 and two more in 2026, with borrowing costs falling to 3.25%. The bank does not expect any action from the ECB.
As a result, the rate differential will narrow from the current 225 bps to 125 bps. This will reduce the yield spread between US and German bonds, which has historically led to a rally in the EURUSD pair. Moreover, the European Central Bank does not seem to be concerned about the strengthening of the euro. Luis de Guindos, who previously warned that the single currency’s surge above 1.2 against the greenback would complicate the situation for the eurozone, is now saying the opposite. According to the Vice-President, the ECB has no specific threshold, and it is better not to watch the performance of the major currency pair.
Meanwhile, Joachim Nagel is not concerned about the current levels of the EURUSD pair. The 14% rally since the beginning of the year exaggerates the extent to which a strong currency burdens exports and the eurozone economy. In fact, one should look at the trade-weighted euro exchange rate. It is not rising as fast as the US dollar is falling.
EURUSD Performance and Euro Trade-Weighted Index
Source: Bloomberg.
The ECB is not concerned about the stronger euro, and the US administration is set on significantly weakening the greenback; the EURUSD pair is poised to surge.
Weekly EURUSD Trading Plan
Against this backdrop, it is time to buy the EURUSD pair on dips, primarily caused by good news for the US dollar, as well as on breakouts of resistance levels. Thus, if the price breaches the 1.1825 mark, long positions formed at 1.1745 and 1.176 can be increased.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
