EUR/USD edged higher after marking a fresh cyclical low at 1.1215. Near-term support is seen at 1.1200, described as the August–September 2024 double top, while a deeper level sits at 1.1111, the 50% retracement of the 2025–2026 uptrend. Eurozone September preliminary CPI was mixed: the headline print ran hot, while underlying measures matched expectations.
Inflation remains above target, and an improving growth backdrop is framed as leaving the ECB with room to raise rates further. Market pricing in swaps points to nearly 75bps of additional tightening to 3.25% over the next 12 months, which would narrow policy divergence with the Fed and temper the associated drag on EUR/USD. Still, firmer US growth momentum versus the Eurozone and a worsening budget situation in France keep the balance of risks tilted lower for the pair in coming months.
Key EUR/USD Support Levels And ECB Policy Outlook
We are closely watching EUR/USD as it stages a minor recovery after striking fresh cyclical lows around 1.1215. In the coming weeks, derivative traders should look to establish strategic positions around the key immediate support levels of 1.1200 and 1.1111. The 1.1200 level is highly significant as it represents the double top from late 2024, while 1.1111 marks a crucial 50% retracement of the 2025–2026 uptrend.
Recent Eurozone inflation data shows headline CPI remains stubborn, which keeps pressure on the central bank to maintain a restrictive stance. Market swap pricing currently indicates that we could see up to 75 basis points of additional rate hikes over the next twelve months, taking the key deposit rate toward 3.25%. While this hawkish outlook limits the policy divergence between the European Central Bank and the Federal Reserve, it may only provide short-term support for the euro.
Downside Risks, Fiscal Divergence, And Trading Implications
We believe the broader risks for EUR/USD remain heavily tilted to the downside due to the stark divergence in fiscal health and economic growth. US gross domestic product growth continues to outpace the Eurozone, supported by robust consumer spending and a resilient labor market. Meanwhile, France’s widening budget deficit, which has recently threatened to exceed 6% of GDP, creates persistent political and financial instability within the monetary union.
For derivative traders, this environment favors selling EUR/USD rallies or using options strategies to hedge against sudden downward breaks. We suggest looking at put options with strike prices targeting the 1.1100 level to capitalize on Eurozone fiscal vulnerabilities. Historically, prolonged budget uncertainties in major Eurozone economies have triggered swift capital outflows, making tight risk management essential as we navigate the weeks ahead.
