The euro may approach its summer highs if the Federal Reserve signals a softer stance, but ongoing geopolitical and energy risks could limit the dollar's decline and keep the EUR/USD outlook uncertain.
The euro is edging closer to levels last seen in the summer, with traders watching the upcoming Federal Reserve policy decision as a possible turning point. Citi strategists now see a real chance that EUR/USD could approach 1.17 if the Fed's move prompts investors to sell the dollar. Still, the euro's recent swings have also reflected the European Central Bank's (ECB) latest policy steps and a shifting economic backdrop.
On September 10, 2026, the ECB raised all three of its key interest rates by 25 basis points, bringing the deposit rate to 2.50% as of September 16. The move was a response to renewed inflation pressures, mainly from rising energy prices linked to the ongoing conflict in the Middle East. The euro dropped to $1.1612 right after the decision, showing how sensitive the market is to both monetary policy and geopolitical events. The ECB's Governing Council pointed to persistent risks of higher inflation and weaker growth, highlighting the difficult environment for policymakers in its official statement.
Fed policy and market reaction
Central bank decisions rarely happen in a vacuum. The Federal Reserve's upcoming meeting is widely expected to bring a modest rate increase, with traders putting the odds of a 25 basis point hike at 85% for the September 15-16 meeting after stronger US inflation data. Investors will be watching the Fed's guidance for any sign of a less aggressive approach. If the outcome is seen as a chance to take profits on recent dollar gains, the euro could rally. But the size of any move will depend on how markets weigh the Fed's message against ongoing global risks and the relative strength of the US economy, which has continued to support the dollar through higher real interest rates and safe-haven demand, as noted by both the Federal Reserve and Reuters.
In recent months, rates markets have priced in higher terminal interest rates across major economies, reflecting both inflation concerns and the resilience of global investment-especially in sectors tied to artificial intelligence. Despite the energy shock that has hit Europe and beyond, US economic growth has stayed strong, supporting demand for the dollar even as other currencies lag. The ECB has revised its inflation forecast for the eurozone to an average of 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028, with GDP growth now expected at 0.9% for 2026, underlining the region's ongoing challenges.
Geopolitics and energy complicate the picture
Geopolitical tensions and energy market swings continue to cloud the outlook for both the euro and the dollar. The ECB's latest rate hike was its second in a row this year, a direct response to inflation driven by higher energy costs from the US-Iran conflict. This has led to expectations of more policy tightening as early as October, according to market participants and Reuters. Even so, the ECB's actions have not been enough to drive a lasting euro rally, as market skepticism and external shocks continue to weigh on sentiment.
For the euro, the link between interest rates and currency strength has become less predictable. Energy costs and geopolitical uncertainty have distorted the usual models, making it harder for policy tightening to boost the currency. Meanwhile, the dollar continues to benefit from its reputation as a safe-haven asset, especially when global risks are high. ECB President Christine Lagarde said the latest decision was unanimous and straightforward, but also stressed that the central bank will remain data-dependent and avoid locking in a fixed rate path, reflecting the cautious approach of major central banks.
Technical levels and short-term scenarios
Technically, EUR/USD has found support near 1.1575, a level that marked the high after the post-Liberation Day rally and has acted as a pivot within the pair's 1.14 to 1.18 range over the past year. Staying above this level keeps the near-term outlook tilted toward further euro gains, but any upside is likely to be limited by ongoing geopolitical pressures and the appeal of US real yields. In the days before the latest ECB and Fed meetings, EUR/USD traded in a narrow band around $1.1630-1.1590, showing the market's caution ahead of major policy announcements from both central banks.
According to data from Investing.com and central bank releases, EUR/USD has traded between 1.14 and 1.18 over the past year, with the summer high near 1.17 acting as a key resistance level. Whether the pair can break above this range will depend not only on the Fed's decision but also on how markets judge the balance of risks facing both economies, including inflation, energy prices, and geopolitical events.
Longer-term outlook
Looking past the immediate Fed meeting, Citi strategists still see a stronger dollar over the next six to twelve months compared to the short-term view. Persistent geopolitical risk premiums, along with the US's relatively high real interest rates, are likely to keep the dollar supported even if it faces a short-term pullback. For the euro, further gains will require more than just tough talk from central bankers; a real improvement in Europe's energy and geopolitical situation is needed. The ECB's latest forecasts and policy stance highlight the challenges the eurozone faces as it tries to balance inflation control with economic growth.
Markets remain highly sensitive to both central bank signals and outside shocks. The euro's path higher is not blocked by policy alone, but by a mix of risks that continue to favor the dollar's defensive appeal. Until Europe addresses its energy vulnerabilities and geopolitical tensions ease, any euro rally triggered by a "sell the news" reaction to the Fed is likely to be limited. The real test for EUR/USD will come not from a single policy move, but from how both economies handle a world where traditional currency drivers are often overshadowed by unpredictable global forces.
Central bank policy decisions, such as those by the Federal Reserve and the European Central Bank, influence currency values mainly through changes in interest rates and forward guidance. But the impact of these decisions can be amplified or muted by outside factors like energy prices, trade balances, and geopolitical events. In recent years, the usual link between policy rates and currency strength has weakened, as markets react more to perceived risks and global shocks than to small changes in official rates. This shift makes it even more important to watch not just central bank actions, but also the broader context in which they happen.
