EUR/USD forecast: Fed and ECB take centre stage, but oil still calling the shots

• EUR/USD forecast: downside risks remain if the Fed leans hawkish
• Oil and geopolitics continue to overshadow central bank guidance
• EUR/USD edges back above 1.15, but conviction is still lacking

 

The US dollar has softened slightly over the past couple of sessions, helped along by a modest recovery in equities. There’s a hint of risk appetite creeping back in, largely because oil prices have paused after their recent surge. Some investors seem comfortable betting that tensions around Iran could ease, prompting a bit of dip-buying in stocks. That said, it’s far from a settled picture. With the Strait of Hormuz still effectively constrained, plenty of traders are choosing to stay cautious. The result is that FX markets are stuck in a holding pattern. That leaves the near-term EUR/USD forecast finely balanced heading into a packed central bank calendar. Both the Federal Reserve and the European Central Bank are due to deliver policy updates, and for now, traders seem reluctant to take strong positions ahead of either. Still, if you had to lean one way, the bias looks slightly in favour of the dollar — especially if oil prices start pushing higher again.

 

Dollar steady, but not behaving as expected

 

What’s been interesting over the past couple of days is how the relationship between oil and the dollar has started to wobble. Typically, rising oil prices support the greenback through the inflation channel. This time, that link hasn’t held as firmly. There are a couple of ways to read that. One is that markets are already looking beyond the current tensions and pricing in some form of resolution. Another is more tactical — position-squaring ahead of the Fed decision rather than a genuine shift in sentiment.

 

Either way, markets remain highly sensitive to developments in the Middle East, particularly anything that impacts energy flows through the Strait of Hormuz. That’s still the bigger macro driver in the background.

 

As for the Fed, no one is expecting a rate move. The spotlight will instead fall on the Dot Plot. Right now, it signals one cut before year-end, but there’s room for that to shift. If policymakers scale back those expectations — or even remove them — the dollar could catch a short-term bid.

 

The challenge, though, is credibility. With the geopolitical backdrop so fluid, any forward guidance could quickly become outdated. It wouldn’t be surprising to see Jerome Powell keep things deliberately vague, especially on the inflation impact of oil.

 

EUR/USD forecast: ECB up next

 

Once the Fed is out of the way, attention quickly turns to the ECB.

 

The central bank remains focused on inflation, but the growth outlook is becoming harder to ignore. Recent sentiment indicators — like the ZEW survey — have already started to reflect the strain from higher energy costs and geopolitical uncertainty.

 

That could nudge the ECB toward a more cautious tone. If policymakers downplay the persistence of energy-driven inflation or highlight downside risks to growth, it might temper the more hawkish expectations that have crept into the market.

 

That’s broadly the expectation here. Still, whether that’s enough to meaningfully weaken the euro is another question — especially with so much of the narrative being driven externally by oil and geopolitics.

 

Key levels shaping the EUR/USD forecast

 

 

Technically, the EUR/USD isn’t giving much away. On the positive side, the pair has held above the 1.14 handle, roughly aligning with last summer’s lows, and has managed to reclaim the 1.15 handle. That has helped to offer some near-term stability. But zoom out slightly, and the structure still looks bearish. Lower highs remain in place, and the break below the 21-day EMA — now sitting under the 200-day average — doesn’t paint a particularly encouraging picture either.

 

Resistance around 1.1560 could cap any upside attempts. If it does, it would suggest that the broader bias still favours the downside. For that bearish momentum to reassert itself, though, a clean move back below 1.15 would likely be needed here.  For now, that level looks pivotal.

 

The bottom line

 

The near-term EUR/USD forecast is unlikely to be about traditional rate differentials, but more about where oil prices head next. If the Fed surprises on the hawkish side and oil resumes its climb, the dollar could regain control. But if energy markets stabilise, the EUR/USD may continue to drift sideways, and head a bit higher still.

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

 

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