Euro posts modest lossess on rising Fed hike odds, Middle East tensions

The EUR/USD pair trades with mild losses near 1.1375 during the early Asian trading hours on Friday. The US Dollar (USD) strengthens against the Euro (EUR) amid hawkish signals from the Federal Reserve (Fed) officials and a lack of progress between the US-Iran talks. Traders brace for the Fedspeak later on Friday.

The 30-year US Treasury bond yield reached a high of 5.501%, a level not seen since June 2004, while the US 10-year Treasury yield climbed to 5.223%, a level not reached since June 2007. Traders raise their bets on another Federal Reserve rate hike as oil prices rise, the US economy remains resilient, and Fed policymakers deliver hawkish remarks.

Philadelphia Fed President Anna Paulson said on Thursday that additional tightening could be needed if the economy continues to evolve as expected. She added that inflation remains well above the Fed's 2% target.

According to the CME FedWatch tool, markets are now pricing in nearly a 67.5% odds of an October benchmark rate hike, up from 55.4%  a week earlier and 11% a month earlier.

Meanwhile, talks between the United States (US) and Iran showed little sign of progress. Iranian President Masoud Pezeshkian said that it is for the US to decide whether to end its war against the Islamic Republic, as Tehran does not wish to continue fighting, per Fox News. However, negotiations are stalling as neither side wants to surrender its leverage, according to comments to Reuters from two Iranian sources.

Uncertainty surrounding the US-Iran negotiation and ongoing Middle East conflicts could boost safe-haven flows, supporting the Greenback and acting as a headwind for the major pair.

Euro stays soft as spreads widen despite improving German sentiment

Strategists at Scotiabank note that the Euro “retains a soft undertone,” with price action still reflecting “the sustained widening in front-end spreads on the one hand and ongoing EU concerns about the impact of a potential US export ban of diesel on the other (despite US denials yesterday that it would not pursue a 90-day ban).” On the data front, they highlight that Germany’s IFO survey “improved a little more than expected in September, with the Business Climate Index firming to 89.9 and Expectations rising to 90.4.” Scotiabank adds that “the IFO sentiment data has diverged (unusually) from German GDP since 2024,” but the “lag remains apparent” and “improved sentiment aligns somewhat better with firming growth trends in the economy.”

Fed's Hammack flags upside inflation risks, keeping Dollar bulls

Fed's Hammack delivers a firmly hawkish message, with a FXS Speechtracker score of 7.4/10, only slightly softer relative to the historical average of 7.6/10. Emphasis that "price stability is responsibility of central banks" alongside warnings that inflation remains elevated amid solid demand and risks are tilted to the upside underscores a strong commitment to restrictive policy. The caution that prolonged high inflation becomes harder to tame reinforces expectations that the Fed will resist premature easing, a backdrop typically supportive for the Dollar.

The FXS Fed Sentiment Index slipped by 0.46 points to 148.18, signaling a modest pullback in hawkish intensity compared to recent communications. However, with the index still deep in hawkish territory well above the 100 neutral mark, the overall policy tone remains restrictive despite the slight softening captured by the FXS Speechtracker.

Technical Analysis: EUR/USD keeps a bearish vibe amid oversold condition

In the daily chart, EUR/USD extends its slide below the 20-day Bollinger middle band and the 100-day simple moving average (SMA), both acting as a cap on the topside. This location under key daily averages reinforces a bearish near-term bias, even as the latest Relative Strength Index (RSI) reading at 25.13 signals oversold conditions that could slow the downside rather than reverse it decisively.

On the downside, immediate support is offered by the lower Bollinger Band at 1.1355, where selling pressure could pause. On the topside, initial resistance is seen at the 100-day SMA at 1.1532, followed closely by the 20-day Bollinger middle band at 1.1535, while a more significant barrier emerges at the upper Bollinger Band near 1.1715, which would cap any deeper corrective bounce for now.