Can EURUSD extend its decline?

Is the euro's slide against the dollar just getting started? With the Fed turning more hawkish and the Eurozone exposed to rising energy costs, this EURUSD forecast breaks down whether Fed-ECB divergence has further room to run.

Euro-dollar (EURUSD) has come under renewed pressure, falling below 1.1500 as the US dollar strengthened following the Fed's latest rate decision. The decline reflects a firmer US monetary policy outlook. The Fed raised its federal funds target range to 3.75%–4.00%, and its projections show most officials expect at least one more increase later this year, while Fed Chair Warsh reiterated concerns over persistent inflation.

At the same time, the euro area faces a difficult combination of elevated inflation and downside risks to growth. As a large net energy importer, higher energy prices could worsen the Eurozone's terms of trade, reduce real household incomes, and increase production costs. This creates additional pressure on the ECB as policymakers balance inflation risks against a more fragile growth outlook. This EURUSD forecast breaks down both sides of that Fed-ECB divergence—a dynamic we cover in more depth in how to trade central bank divergence—and what it means for the pair's next move.

Key takeaways

1. The Fed turned more hawkish in September. Policymakers raised the federal funds target range to 3.75%–4.00%, with projections pointing to another hike before year-end.
2. EURUSD has broken below 1.1500. The pair's decline reflects both dollar strength and mounting pressure on the euro from energy-driven risks.
3. The Eurozone's energy exposure is a key vulnerability. As a large net energy importer, higher energy prices squeeze household incomes and worsen terms of trade.
4. The ECB faces a difficult trade-off. Despite raising its deposit rate to 2.50% in September, elevated energy costs risk weakening growth even as inflation stays above target.
5. Technical signals point to further downside. EURUSD has broken below 1.1520 and remains under its descending trendline, with support at 1.1320 and 1.1210 if the decline continues.

A more hawkish Fed outlook strengthens the US dollar

The Fed has become a key factor in the recent decline in EURUSD after raising the federal funds target range by 25 basis points to 3.75%–4.00% in September. Policymakers' projections indicate that another rate increase could follow before the end of 2026, while Fed Chair Warsh has continued to emphasise the importance of containing elevated inflation.

A higher-for-longer US interest-rate outlook can support the US dollar by keeping Treasury yields elevated—a dynamic also shaping gold's 2026 trading outlook. If incoming US inflation and economic data reinforce expectations for another hike, the US dollar may remain supported and create further downside pressure for EURUSD.

Summary

The Fed's hawkish September move and Warsh's continued inflation warnings are giving the dollar a clear tailwind, and any confirmation of further tightening could deepen EURUSD's decline.

Eurozone energy dependence creates inflation and growth risks

The Eurozone's position as a large net energy importer makes the economy particularly sensitive to changes in energy prices. When energy prices rise, the cost of imported energy increases relative to domestically produced goods, worsening the region's terms of trade and transferring income to energy exporters. The ECB notes that the conflict is dampening household real incomes and keeping private consumption moderate.

This creates a difficult environment for the euro. Higher energy prices can push headline inflation higher while simultaneously weakening economic activity through lower purchasing power, higher business costs and weaker demand. ECB staff's September projections show headline inflation peaking at 3.6% in the fourth quarter of 2026, while alternative scenarios involving a more persistent energy shock would result in both higher inflation and weaker growth.

Summary:

The Eurozone's heavy reliance on imported energy leaves it exposed to a genuinely difficult combination—rising inflation and weakening growth at the same time—which limits how much support the euro can draw from the ECB.

Higher energy prices could complicate the ECB's policy path

The energy shock creates a particularly challenging policy trade-off for the ECB, which has already raised its deposit rate twice this year, most recently by 25 basis points to 2.50% in September. Persistent increases in energy prices can keep inflation above target and encourage a more restrictive monetary policy stance. However, the same shock can weaken consumption and investment by reducing real incomes and increasing operating costs.

This combination may weigh on the euro if markets become more concerned about the growth consequences of the energy shock. The ECB's September projections expect eurozone GDP growth of 0.9% in 2026, a slowdown from 2025 despite a small upward revision, while warning that the outlook remains highly uncertain because of the Middle East conflict, the blockade of the Strait of Hormuz, and energy-price volatility.

If energy prices remain elevated for longer, the Eurozone could therefore face a more difficult growth environment even as inflation remains above target—a risk also flagged in our broader 2026 global indices outlook. This may limit the ECB's flexibility and increase the divergence between the US and Eurozone economic outlooks.

Summary:

The ECB is caught between fighting energy-driven inflation and protecting a fragile growth outlook. A bind that could widen Fed-ECB divergence further if the energy shock proves more persistent than expected.

Interest-rate differentials remain a headwind for EURUSD

The ECB's policy path remains an important counterweight to the bearish euro outlook. Persistent inflation could keep policymakers focused on restrictive policy after the September hike, limiting the interest-rate differential with the US.

However, the Fed's current rate range remains significantly above the ECB's 2.50% deposit rate. If US inflation remains sticky while economic activity proves resilient, markets may continue to price a more restrictive Fed path. Higher US yields relative to European yields could therefore continue to favour the dollar and weigh on EURUSD.

At the same time, downside risks to Eurozone growth could reinforce this dynamic. A combination of elevated energy costs, weak export competitiveness, and pressured household purchasing power may limit the euro's ability to benefit from higher ECB rates.

Summary:

Even with the ECB tightening, the rate gap still favors the dollar—and weak Eurozone growth fundamentals mean the euro may not fully capture the benefit of higher European rates.

EURUSD remains below key technical resistance

EURUSD daily chart shows prices retreated below recent highs while forming broader lower swing points, reinforcing its bearish momentum.

From a technical analysis perspective, EURUSD has broken below the 1.1520 level and remains below the descending trendline, signalling continued bearish momentum. The EMA21 has also crossed below the EMA63, while the MACD has moved below the zero line with the histogram turning negative, suggesting further downside potential. If EURUSD remains below 1.1520, a further decline towards the support at 1.1320 may follow, while a decisive break below 1.1320 could expose the next support at 1.1210. Conversely, a recovery above 1.1520 could ease the immediate selling pressure, with resistance at 1.1650 and the descending trendline potentially limiting its upside.

Summary:

Both trend and momentum indicators point lower for now, with 1.1320 and 1.1210 as the key downside levels to watch—though a recovery above 1.1520 would meaningfully shift the near-term picture.

Final thoughts: EURUSD faces pressure from Fed divergence and Eurozone energy risks

The broader outlook for EURUSD remains bearish with a more hawkish Fed, elevated US yields, and a relatively wide interest-rate differential supporting the US dollar. At the same time, the Eurozone's dependence on imported energy leaves the economy exposed to a difficult combination of higher inflation and weaker growth when energy prices rise. This EURUSD forecast will likely hinge on how far the Fed-ECB divergence widens from here—and whether the energy shock proves temporary or more persistent.

Disclaimer: This article is for informational purposes only and does not constitute financial or trading advice. Always conduct your own research or consult a licensed financial advisor before making any investment decisions.