The EUR/USD pair has demonstrated remarkable strength in recent sessions as it continues to trade near four-year highs, driven by a combination of robust Eurozone data and heightened expectations for Federal Reserve policy easing. The currency pair reached its highest level since September 2021 on Tuesday with the euro trading at 1.1879 before pulling back slightly to current levels around 1.1810 as markets digest fresh economic data.
Key Drivers Behind Recent EUR/USD Strength
The pair's upward trajectory has been significantly influenced by two major developments: the robust US retail sales report and Eurozone inflation dynamics that have collectively shaped market expectations for central bank policy direction. The recent 0.6% month-over-month increase in US Retail Sales, far exceeding the consensus forecast of 0.2%, signaled stronger-than-anticipated consumer spending momentum despite persistent tariff pressures on prices.
US Economic Data and Monetary Policy Expectations
The surprising strength in August retail sales data has created a complex dynamic for market pricing. While US economic indicators continue to show resilience, the markets are now fully pricing in an imminent 25-basis-point Federal Reserve rate cut with approximately 95% probability ahead of Wednesday's policy decision.
Markets have priced in about 67 basis points of cumulative easing by year-end and appear increasingly certain that additional cuts will follow. This expectation has contributed to a broad-based USD weakness as investors position for an extended easing cycle, particularly after the US Federal Reserve Chair Jerome Powell signaled potential interest rate reductions at Jackson Hole.
The Eurozone's inflation data released on September 17th provided crucial context for market positioning. Finalized August CPI came in at 2.0% year-over-year (unchanged from July), with services remaining the primary driver of price growth, contributing +1.44 percentage points to annual rate compared to food and energy sectors.
ECB Policy Stance and Market Reaction
The European Central Bank's policymaker Ebrahim Shournaras recently commented that "a soft landing has been achieved, but must remain flexible and ready to act." This dovish yet cautiously optimistic tone from ECB officials has contributed positively to the Eurozone currency outlook without signaling immediate rate cuts.
Notably, the ECB continues to emphasize price stability while acknowledging improving economic conditions. The central bank's policy approach appears aligned with maintaining favorable financing conditions that support a gradual recovery across the bloc, which aligns well with current market expectations for European monetary policy divergence from US rates.
Techical Analysis and Current Price Action
EUR/USD has successfully defended key technical levels during its recent rally. The pair formed consolidation around 1.1762 before breaking upward to complete an impulsive move toward the 1.1877 high, now testing resistance at multiple psychological levels including 1.1909 and ultimately reaching a four-year peak of approximately 1.1854.
Key Technical Levels Now in Focus
The current price action has established several critical technical zones that market participants will closely monitor:
- Immediate Support Zone: 1.1790-1.1825 Range
- Daily Pivot Point: 1.1834
- Key Resistance Zones: 1.1860, 1.1880, and then the psychological barrier at 1.1920
- Larger Support Level: 1.1750 (Intermediate Pivot)
- Major Support Zone: 1.1650-1.1600 Range
The recent price action has been characterized by a strong upward channel formation, with the pair currently consolidating gains above both daily and weekly moving averages after testing resistance near 1.1879.
Upcoming Market Events: September 17-28, 2025
The next week presents several critical events that could significantly impact EUR/USD price direction as markets await the Federal Reserve's decision and subsequent guidance on monetary policy path. These developments will be pivotal in determining whether current momentum continues or reverses.
September 17th: The Fed Decision Day
The most significant event for immediate market reaction is scheduled to occur today, September 17th, with the Federal Open Market Committee (FOMC) meeting. Key events include:
- Federal Funds Rate Decision at 6:00 PM EDT - Markets fully expect a quarter-point cut from current levels of 4.50% to 4.25%
- FOMC Economic Projections and Dot Plot Release at 6:00 PM EDT
- FOMC Statement at 6:00 PM EDT - This will provide the official policy statement on monetary policy direction
- FOMC Press Conference at 6:30 PM EDT - The chairman's comments and Q&A will offer crucial insight into future rate trajectory expectations
The outcome of these proceedings could trigger substantial volatility in EUR/USD as the market seeks to price in further easing opportunities. A more dovish-than-expected statement or dot plot suggesting additional cuts beyond current pricing would likely extend USD weakness and support euro gains.
September 18th: US Unemployment Claims Data
The following day, September 18th, markets will monitor the release of US Initial Jobless Claims data with a forecasted decline to 241K from previous reading at 263K. This report represents one of the most immediate indicators for labor market conditions and could significantly influence expectations about future Fed policy.
A stronger-than-expected jobless claims number would likely reinforce USD weakness as it may indicate persistent economic strength that could delay additional rate cuts, while a weaker reading might accelerate dovish positioning in currency markets. Given current price action at resistance levels near 1.1900, this data release will be pivotal for confirming whether the pair can consolidate above key technical barriers.
Forward-Looking Scenarios: EUR/USD Outlook
The upcoming events provide clear scenarios that market participants should consider when positioning themselves in EUR/USD ahead of and during the Fed decision period. Both bullish and bearish outcomes remain possible depending on how markets interpret the policy signals.
Bullish Scenario Pathway
If the Federal Reserve maintains a clearly dovish tone with an aggressive rate-cut path, including indications of multiple cuts beyond September's expected 25 bps move, EUR/USD could extend its rally toward key resistance levels. A decisive break above yesterday's high at approximately 1.1879 might target the next psychological level near 1.1909 before continuing upward.
Should market expectations for additional Fed easing accelerate beyond current pricing of roughly 67 basis points by year-end, euro strength could continue toward resistance levels around 1.1920 and potentially test monthly highs at approximately 1.1950 in the coming sessions. The technical structure would remain favorable as long as price action holds above the key intermediate pivot support level near 1.1750.
Bearish Scenario Pathway
A more hawkish-than-expected FOMC statement could trigger a reversal, with EUR/USD potentially dropping toward immediate support levels at approximately 1.1825 before testing the next major floor near 1.1790. A break below this zone would indicate potential for further downside as bears target intermediate pivot points around 1.1750 and then key long-term resistance-turned-support at 1.1650.
Should the Fed's dot plot suggest a more gradual approach to rate cuts or express concerns about persistent inflation, markets might react by strengthening USD against all major currencies, including EUR/USD breaking below critical technical support levels that could accelerate downside momentum toward monthly lows near 1.1728 as seen earlier this month.
Neutral Scenario Considerations
A moderately dovish statement with a conservative dot plot would likely result in consolidation within the current trading range between approximately 1.1790 and 1.1850 before markets determine whether to extend either bullish or bearish momentum. A lack of clear guidance from central bank officials could leave EUR/USD stuck in this sideways pattern for several sessions, with technical resistance at around 1.1860 serving as a key decision point.
Conclusion: Strategic Positioning Ahead
The current market environment presents an opportunity to assess whether the recent euro strength represents genuine fundamental momentum or merely extended positioning ahead of major central bank decisions. The Fed's upcoming policy statement and dot plot will be pivotal in determining EUR/USD direction over the next week.
As long as price holds above 1.1790, the technical structure remains bullish with resistance levels at approximately 1.1860-1.1880 offering potential short-term targets before testing more significant psychological barriers near 1.1920 and ultimately 1.20.
Traders should prepare for increased volatility surrounding today's FOMC meeting, with the first major decision point likely coming within an hour of the Federal Reserve statement release at 6:00 PM EDT on September 17th. The subsequent press conference will provide additional clues about potential future policy direction that could extend EUR/USD strength or trigger a reversal toward immediate support levels near 1.1825.
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