EUR/USD sparked breakdown with hawkish Fed signal: What’s next for Euro?

Fed holds steady, but hawkish tone surprises markets

The Federal Reserve left its benchmark interest rate unchanged at 4.5%, as widely expected. However, the real story wasn’t in the rate hold. It was in the Fed’s messaging and projections, which leaned more hawkish than markets anticipated.

• Only one rate cut is now projected in 2025, versus the two or more previously priced in.
• The longer-term rate projection was revised higher to 3%, suggesting that the Fed sees a structurally higher rate environment going forward.
• Year-ahead projections also showed a steady rise in expectations: 1-year at 3.6%, 2-year at 3.4%, and current year at 3.9%.

The Dollar holds the high ground after the Fed

The U.S. dollar has regained control across the majors this week, building on momentum following the Federal Reserve’s hawkish pause. While recent inflation data, including softer CPI and PPI prints, pointed to progress, the Fed struck a more cautious tone, signaling it needs “greater confidence” before pivoting to rate cuts. The updated dot plot now projects just one rate cut in 2025, down from the two or three previously anticipated, reflecting a central bank still concerned about sticky services inflation and a resilient labor market.

Euro retreats as Dollar strengthens post-Fed

As a result, Treasury yields remain elevated, and risk sentiment has shifted, favoring the dollar once again. This is being felt most notably in EUR/USD, which is on the defensive as the greenback reasserts dominance. With eurozone data offering little to counterbalance the narrative, Powell’s firm stance and the Fed’s pullback on easing expectations have become the key drivers dragging the euro lower.

Previously, I have outlined potential scenarios for EUR/USD in my latest analysis, EUR/USD Retests 1.14890: Will the Fed Spark a Rebound or Breakdown?, and apparently, the bearish scenario is now playing out after a hawkish stance from the Federal Reserve.

The euro failed to hold above the line at 1.14890 level and is now drifting lower as outlined.

Technical outlook

Bullish case (less likely for now): Reclaiming structure from 1.1480

Should price rebounds above the 1.1480 level and form a higher low, a bullish reversal may build up, especially if U.S. data disappoints later in the week.

• 1.1450 level holds and pauses from downside move
• Consolidation suggesting weakness on dollar
• Dollar pullback

Targets:

• 1.1480 level
• Reclaim 1.150 level

Bearish case:

If the current bearish structure holds, EUR/USD could continue its decline toward lower support zones.

• Price forms a lower high rejection following a weak bullish retracement.
• Break below 1.1405 confirms bearish continuation structure.
• Bearish pressure remains as long as DXY holds its bullish path.

Targets:

• 1.1405 immediate low.