EUR/USD Weekly Forecast: Fed and ECB monetary policy decisions coming in a war scenario
- The Middle East war continues to intensify, shaping the market’s mood.
- United States core PCE inflation, the Fed’s favorite inflation gauge, hit 3.1% YoY in January.
- The Federal Reserve and the European Central Bank are set to announce monetary policy decisions.
- EUR/USD is technically bearish and could soon pierce the 1.1400 threshold.
The EUR/USD pair fell to fresh 2026 lows in the 1.1430 region, settling not far above the level, as the US Dollar (USD) soared amid war-related fears as the Middle East crisis escalates on a daily basis.
Two weeks into the Iran war, risk aversion is the main driver of the markets. Skyrocketing oil prices amid supply disruptions are fueling inflation concerns, while spurring speculation that most central banks will have no choice but to hike rates.
Iran war changes inflation and central banks’ perspectives
The United States (US) and Israel joined forces and launched a massive attack on Iran aimed at destroying its nuclear program. The initial attack that took place on February 28 resulted in the killing of Iran’s Supreme Leader Ali Khamenei. But the troubled country did not hesitate and responded, hitting US bases in neighbouring countries, with the war quickly spreading through the Persian Gulf.
Back-and-forth attacks continue, while Iran practically seized control of the Strait of Hormuz, the only sea passage from the Persian Gulf to the open ocean, and a vital point in the region’s oil exports.
Iran’s new Supreme Leader, Mojtaba Khamenei, released his first statement in which he pledged to keep the Strait of Hormuz shut, while stating that attacks on neighbours will inevitably continue.
Also, US President Donald Trump expressed through Truth Social. Trump claimed higher oil prices are not a concern for the US, the world’s largest producer, according to his own words. He also claimed a couple of times to have won the war, or to be about to.
Truth is, hostilities have no end in sight. Meanwhile, crude oil prices resumed their bullish run on Thursday, with Brent surpassing the $100 mark and West Texas Intermediate (WTI) running beyond $ 90 a barrel.
Central banks’ decision in the docket
Fears inflation will rise, escalating alongside the Middle East war. Market players are pricing in most major banks, the Federal Reserve (Fed), and the European Central Bank (ECB) will have to change course. In the case of the Fed, investors are betting on no rate cuts at least until the September meeting, while in the case of the ECB, rate hikes are seen before year's end.
The Fed is scheduled to announce its monetary policy decision on Wednesday, while the ECB will do the same on Thursday. Both central banks are widely anticipated to keep interest rates on hold, but the Fed will release fresh economic projections, and for sure, war-inflation-related concerns will be put on the table. The same concerns will dominate Chair Jerome Powell’s presser and ECB President Christine Lagarde's post-decision words.
Meanwhile, US inflation, as measured by the change in the Personal Consumption Expenditures (PCE) Price Index, edged lower to 2.8% in January from 2.9% in December, although the core annual reading hit 3.1% in January, higher than the previous 3%. US inflation had been rising for some time before the war began.
As for Eurozone inflation, the final estimate of the February Harmonized Index of Consumer Prices (HICP) will be released ahead of the ECB announcement, and is expected to be confirmed at 2.4% YoY.
EUR/USD technical outlook
Technical readings in the daily chart show that EUR/USD is biased lower. The price is extending below the 20-day Simple Moving Average (SMA) at 1.1700 and converging with a flat 100-day SMA, also clustered around 1.1700. The 200-day SMA is barely below the shorter ones and lacks directional strength. The downside break from the prior consolidation is backed by a deeply negative slope in the Momentum indicator below its midline, indicating persistent selling pressure. Finally, the Relative Strength Index (RSI) indicator remains in a downward slope around 26, with no signs of a bottom in sight.
In the weekly chart, EUR/USD is sharply down for a second consecutive week, clearly bearish. The pair plunged below the 20-week SMA, which also stands near 1.170, reinforcing the now resistance area. Price still holds comfortably above the rising 100- and 200-week SMAs, so the broader trend backdrop stays positive even as upside momentum fades. Weekly Momentum has slipped into negative territory, while the RSI indicator dropped toward 40, signaling that sellers have gained control.
Immediate resistance emerges at the former range floor around 1.1600, while SMAs near 1.1700 reinforce the area on rebounds. A weekly close back above 1.1700 would soften the bearish tone and open the way toward the recent highs near 1.1850. On the downside, initial support sits at 1.1400, followed by a more important shelf near 1.1300. A sustained break below 1.1300 would expose the next downside area toward the rising 100-week SMA around 1.12, where medium-term buyers would be expected to reassert interest.
(The technical analysis of this story was written with the help of an AI tool.)
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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Author
Valeria Bednarik
FXStreet
Valeria Bednarik was born and lives in Buenos Aires, Argentina. Her passion for math and numbers pushed her into studying economics in her younger years.
