By: Michael Boutros, Sr. Technical Strategist
After two ECB rate hikes, the European Central Bank's room to tighten further is narrowing because a weakening growth outlook now sits alongside persistent inflation. Christine Lagarde has flagged inflation risks tilted to the upside and growth risks tilted to the downside, a combination that constrains how far the European Central Bank can push rates. The Federal Reserve, meanwhile, has resumed hiking for the first time since 2023, and fed funds futures price roughly a 67% probability of another move in October. The gap between the two tightening paths keeps the policy backdrop in favor of the U.S. dollar and leaves EUR/USD sitting at a major pivot on its charts.
Michael Boutros, StoneX Media Senior Market Analyst, has more than 20 years of experience trading FX, commodities and equity indices, including nearly two decades on FX trade desks and brokerages. He analyzes currency markets through a structured technical approach across multiple time frames, with a medium-term, event-driven focus on how central bank decisions move pairs such as EUR/USD.
The European Central Bank's scope to keep raising rates is narrowing because its growth outlook is deteriorating even as inflation stays elevated. Boutros sums up Lagarde's position as "while the inflation risk remains weighted to the upside, the growth outlook remains weighted to the downside", a balance that leaves policymakers with fewer clean choices. Two hikes have already come through on the back of persistent inflationary pressure, yet a weaker growth backdrop raises the cost of every additional move. For EUR/USD, the result is a European Central Bank with less room to match a more aggressive tightening path elsewhere, which may limit rate-driven support for the euro.
The Federal Reserve's return to rate hikes, its first since 2023, has shifted the policy balance between it and the European Central Bank toward the U.S. dollar. Fed funds futures price roughly a 67% probability of another 25-basis point hike in October, with the odds of a December move close to even. Both central banks are tightening, so direction alone does not settle the EUR/USD story. Instead, each Federal Reserve and European Central Bank decision becomes a test of which bank is moving faster, not whether either is moving at all. According to Boutros, "the policy backdrop does continue to favor the U.S. dollar, but it is the relative pace of tightening that will be critical".
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Michael Boutros, StoneX Media Senior Market Analyst
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