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Euro's next move against the dollar rests on the tone the Federal Reserve Chair strikes on Wednesday, with strategists warning a hawkish message would drive it to fresh lows.
The euro risks a fresh 2026 low against the dollar should Fed Chair Kevin Warsh reaffirm a hawkish stance at Wednesday's policy meeting, investment bank analysts warn.
The Euro to Dollar exchange rate is exposed to Warsh's message through US Treasury yields, which UniCredit says move in tight step with the dollar: a hawkish Fed lifts the yields that draw capital into dollar assets, while a softer tone eases them and weighs on the US currency.
EUR/USD's direction hinges on the Fed Chair's tone more than the decision itself, with strategists at UniCredit expecting a hold at 3.75-4.00% and a hike in December, "however, what will matter is how hawkish Warsh will sound in his overall assessment of the economic outlook," says Roberto Mialich, FX Strategist at UniCredit.
EUR/USD trades at 1.1145, down for a fourth session and 0.3% above the 1.1114 low it set on 14 October, extending the downtrend we flagged at the start of the week.
EUR/USD goes into the meeting with the dollar already carrying less hawkish Fed pricing, "markets have already begun to adjust to their expectations following less aggressive remarks from influential Fed officials such as John Williams and Michelle Bowman," says Mialich.
EUR/USD would be dragged to fresh lows by a hawkish Warsh, UniCredit warns, "a reaffirmation of the Fed's hawkish stance would push the 10Y UST yield back towards its recent 24-year peak of 5.3475%, reinvigorate the US unit and drag EUR-USD towards or even below its recent low of 1.1114," says Mialich.
The euro also faces rising energy costs, with CIBC's Jeremy Stretch expecting the selling to continue, "given the rapid acceleration in the benchmark natural gas future across H2 to date, approximately 125%, we can expect EUR negativity to persist and or shorts to extend," says Stretch.
EUR/USD would then test the 2026 low and 1.1111, the 50% retracement of the rally from 2025's low to January's high, according to Stretch.
The euro would struggle against a dollar that ING says higher energy prices and a hawkish Fed "can keep… supported this week".
Above: The dollar index is heavily influenced by Fed policy-linked U.S. two-year bond yields.
What a Softer Warsh Would Mean for EUR/USD
EUR/USD would recover should Warsh sound less hawkish, with Mialich expecting the yield support behind the dollar to fade, "less hawkish signals would likely keep the 10Y UST yield below 5% and put further downward pressure on the USD," he says.
EUR/USD stands to gain more from a softer hold than it would lose to a hawkish one, according to strategists at Bank of America, who stand out in expecting a hike this week, "hawkish messaging is broadly neutral, while a dovish hold risks outsized USD weakness," says a BofA Global Research report.
The euro also has room for a sharp rebound because so many investors are betting against it, with CIBC noting that combined real money and leveraged short positions are close to early-2020 extremes, leaving those investors to buy back euros if the Fed disappoints the dollar bulls.
EUR/USD rallies towards 1.13 would meet sellers at J.P. Morgan's London desk, which expects Warsh to stick to his policy of offering no forward guidance, making the meeting "unlikely to be too market moving".
What It Means for GBP/EUR
The euro faces a double test against sterling on Wednesday, with Chancellor John Healey's Budget landing hours before the Fed decision, as Crédit Agricole turns seller of the pound-to-euro rate.
The euro has support against the pound at 0.8333 in EUR/GBP according to J.P. Morgan, equivalent to 1.20 in the Pound to Euro rate.
The euro then meets its own central bank on Thursday, when investment bank analysts expect the European Central Bank to hold rates.
EUR/USD would open a recovery towards the 21-day average at 1.1216 on a softer Warsh; a hawkish one targets a daily close below 1.1114 and a test of 1.1111.
