EUR/USD Price Forecast: US Dollar gains amid fears of aggressive Fed tightening

• With US CPI figures due, EUR/USD reverses its early advance to trade slightly lower.
• Waller’s warning of aggressive Fed tightening if October core CPI accelerates drives a sharp US Dollar recovery.
• Upside inflation risks prompt ECB’s Lane to back a December interest rate increase.

At around 1.1220 against the US Dollar (USD), the Euro (EUR) trades slightly lower in Tuesday’s European session, having relinquished its earlier gains. The reversal in the major currency pair follows a warning that the Federal Reserve (Fed) could pursue aggressive monetary tightening should inflationary pressures in the United States (US) continue to build, lending support to the US Dollar.

After reversing its earlier losses during European trading, the US Dollar Index (DXY) edged into positive territory above 101.70. The index measures the Greenback against a basket of six major currencies.

Speaking during the European session, Fed Governor Christopher Waller said: “Half-point Fed rate hike may be needed in December, if October core CPI inflation comes in around 0.3% or higher,”

Waller raises prospect of half-point December increase as inflation concerns build

A reading of 9/10 on the FXS Speechtracker, against a historical average of 7.3/10, highlights the markedly more hawkish tone of Fed Governor Waller’s remarks and a stronger inclination towards tightening than his established baseline. His explicit support for a half-point FED rate increase in December, conditional on October core CPI coming in at around 0.3% or higher, suggests little tolerance for any renewed deviation from the inflation target. Even with better figures, he favours an increase of at least a quarter-point. Waller also stressed the broad spread of price rises, anticipated further producer price pressures and argued that policy had been less restrictive than previously assumed. Taken together, these points suggest further rate increases are likely and that real rates need to rise to bring inflation back under control, an environment generally favourable to the Dollar but adverse for risk-sensitive assets.

With a 3.17-point increase to 145.50, the FXS Fed Sentiment Index moved further into hawkish territory, comfortably above the neutral 100 mark and consistent with the high FXS Speechtracker reading. Together, the indicators suggest markets are focusing on a renewed commitment to tightening. Unless forthcoming inflation figures demonstrate convincing progress towards the Fed’s target, traders are likely to price in greater odds of a higher terminal rate and a stronger trajectory for the Dollar.

Attention now turns to October’s US Consumer Price Index (CPI) figures, scheduled for release at 13:30 GMT.

US inflation set to ease before pivotal Fed meeting

Following September’s strong reading, Deutsche Bank economists now forecast a marked easing in price pressures. Ahead of the next Fed meeting, their outlook points to a more subdued October CPI report: “this time, our US economists expect inflation to have come down from its September pace, with both headline and core at +0.20% on the month,” they note.

Further tightening of monetary conditions has also received backing from European Central Bank (ECB) officials, providing a policy focus for the Euro.

Lane’s hawkish stance keeps Euro bulls focused on inflation risks

At 7.6 against a historical average of 6.3, the FXS Speechtracker score indicates that the speech had a greater impact than usual and a distinctly hawkish slant. Describing Europe’s resilience as “reassuring” while stressing that French fiscal problems must be resolved in Paris suggests little tolerance for fiscal slippage, supporting a firmer bias for the Euro.

Upside price risks are underlined by guidance that core and food inflation should accelerate, with inflation likely to end the year “a little bit” above 4% and “more to come” before it peaks. The suggestion that a December rate increase would be prudent unless the data change reinforces expectations of further tightening. That prospect supports the Euro through interest rate differentials, while leaving rate-sensitive assets under pressure.

EUR/USD Holds a Modestly Positive Technical Bias

At 1.1219 on the daily chart, EUR/USD remains just above its 20-day exponential moving average (EMA) of 1.1211. This leaves the near-term outlook modestly constructive and points to support forming around the recent breakout zone. Meanwhile, a Relative Strength Index (RSI) reading of 48.6, close to neutral territory, suggests selling momentum has eased, without indicating either overbought conditions or a pronounced market trend.

The 20-day EMA near 1.1211 provides the first downside support. A daily close beneath it would open the way to a deeper retracement and undermine the current signs of stabilisation. Conversely, holding above this moving average would preserve the short-term structure, enabling buyers to maintain control as momentum consolidates.

(The technical analysis of this story was written with the help of an AI tool. Know more.)