EUR – Interest rate trends supporting Euro, but are constrained by political instability in France

The only major indicator due before this week's Federal Reserve meeting is Tuesday's August retail sales report, which is crucial for reflecting consumer demand, the most important component of the economy. The Federal Open Market Committee (FOMC) will meet on Tuesday and Wednesday to review clear signs of labour market weakness and tame inflation in recent weeks. According to data from the London Stock Exchange Group (LSEG), futures markets are currently pricing in a 95% probability of a 25 basis point rate cut by the Fed on Wednesday, and a 5% probability of a 50 basis point cut. Since its last rate cut in December, the Fed's benchmark rate has remained in a range of 4.25% to 4.5%. Markets are also awaiting the Fed's statement and summary of economic projections, as well as subsequent remarks by Chairman Powell. Given the long wait for the impact of tariffs to show up in the data, the Fed has remained on hold after cutting rates by 100 basis points from September to December.

The Euro fell against the U.S. dollar last week before stabilizing. Traders reduced their bets on another European Central Bank rate cut this cycle last Thursday, now pricing in a less than 50% probability. ECB President Christine Lagarde maintained its key interest rate at 2% for the second consecutive meeting last Thursday, stating that the eurozone is in a "good position" and that economic risks are more balanced than previously. However, credit ratings agency Fitch downgraded France's sovereign credit rating to its lowest level ever on Friday, stripping the eurozone's second-largest economy of its AA- rating. France is currently facing a political crisis and ballooning debt. The downgrade to A+ puts significant pressure on newly appointed Prime Minister Jean-Marie Le Corny.

As for the euro against the U.S. dollar, the RSI and Stochastics are trading sideways on the technical charts, while the MACD has also been moving sideways recently, suggesting that the euro has yet to develop a clear direction in the short term. However, if the euro can hold above 1.1670, which represents both its 25-day moving average and its rising trend line, it is likely to remain stable. Nearer resistance is expected to be 1.1750. Furthermore, the euro has not been able to break through the 1.18 level since a brief break in early July, including recent highs of 1.1765 and 1.1779 on Monday and Tuesday, respectively. Therefore, if the euro can break through this level, it could potentially initiate a new uptrend, with extended targets reaching 1.20 and 1.2150. Conversely, if the Euro loses trendline support, it could face a corrective pressure. Using the Golden Ratio, the 23.6% and 38.2% ranges would reach 1.1685 and 1.1630, respectively, while the 50% and 61.8% ranges would reach 1.1580 and 1.1535, respectively. The key support would be at the 1.15 level.

Forecast range:
Resistance: 1.1750 - 1.1800* - 1.2000* - 1.2150
Support: 1.1670 - 1.1630 - 1.1580 - 1.1500/35

Focus:
Monday
Germany's August wholesale prices (2:00 PM)
Eurozone July trade balance (5:00 PM)

Tuesday
Eurozone July industrial production and Q2 labor costs (5:00 PM)
Germany's September ZEW economic sentiment and current conditions index (5:00 PM)

Wednesday
Eurozone August final HICP (5:00 PM)

Any questions? contact our professional analysis team