The dollar is trying to stay strong

EUR/USD

Key zone: 1.1450 - 1.1500

Buy: 1.1550 (on strong positive fundamentals) ; target 1.1750; StopLoss 1.1480

Sell: 1.1400 (on a pullback following a retest of 1.1450) ; target 1.1250-1.1150; StopLoss 1.1470

The Fed raised the rate to 3.75–4.00% and made it clear that inflation remains too high for a rapid pivot toward easier policy. The 10-year Treasury yield is holding near 5%, but that is not enough for the dollar rally to continue: the market is waiting for confirmation of the strength of the U.S. economy.

After seven weeks of pressure on the U.S. currency, the September FOMC meeting became a turning point. The regulator simultaneously stated that economic activity continues to expand at a solid pace, consumer spending remains strong, and inflation remains elevated.

But for the FX market, the new policy trajectory proved more important than the decision itself.

A reminder:

The Fed is no longer giving the market reason to expect a quick return to cheap money. The September hike was the first in more than three years, while new projections from FOMC participants point to the possibility of another hike. The monetary authority effectively signaled a further tightening of borrowing costs — removing one of the main arguments against the dollar.

The U.S. regulator is facing an extremely uncomfortable combination of macroeconomic factors:

• August CPI rose 0.4% m/m and 3.4% y/y, while core inflation stood at 2.4% y/y. The main source of the acceleration in headline inflation was energy: gasoline prices rose 3.9% over the month, while energy prices overall increased by 2.1%.
• Retail sales increased by 1.2% m/m and 6.0% y/y in August, reaching $773.9 billion. This is significantly stronger than what would be expected from an economy that is no longer capable of withstanding elevated interest rates.

In other words, the U.S. economy remains resilient enough for the Fed to maintain a high cost of money, while inflation remains too high for a rapid shift toward easing.

This provides fundamental support for the USD, but a new problem has emerged.

On September 10, the ECB also raised its three key interest rates by 25 bps. The regulator explained the decision by persistent inflationary pressure, including pressure related to the conflict in the Middle East. At the same time, the ECB raised its Eurozone economic growth forecast for 2026 to 0.9% and for 2027 to 1.4%, emphasizing the resilience of the region’s economy.

This destroys the previous simple setup of a “hawkish Fed versus a dovish ECB.” The market will now compare the trajectories of yields and economic growth on both sides of the Atlantic.

That is why the next important point for the FX market is the preliminary PMI readings on September 23.

If the U.S. Composite PMI significantly exceeds the European reading, the market will receive confirmation of the U.S. economic advantage thesis. In that case, high Treasury yields and expectations of further tightening could continue to support the dollar.

If the gap is small or the Eurozone shows unexpectedly strong momentum, part of the USD’s post-FOMC strengthening will be vulnerable to profit-taking.

The most important element of the current USD setup is not in the Fed’s statement, but in the bond market. High Treasury yields increase the attractiveness of dollar-denominated assets for global capital. Therefore, the relationship “Treasuries → dollar” may now prove stronger than the simple setup “Fed raises rates → USD rises.”

And What Is the Result?

The Fed has brought back a scenario in which high interest rates may remain in place for longer, while further tightening remains possible. This does not give the dollar the right to rally indefinitely. New arguments supporting the U.S. advantage must come from strong PMI readings, the 10-year Treasury yield remaining near 5%, resilient domestic demand, and the absence of a rapid downward reversal in inflation.

If this combination persists, pressure on EUR/USD may continue, and the $1.14 level could shift from an intermediate target into the next zone of movement.

If U.S. leading indicators begin to deteriorate, Treasury yields fall below 5%, and the European economy continues to surprise with its resilience, the dollar’s post-FOMC strengthening risks turning out to be nothing more than a corrective move.

So we act wisely and avoid unnecessary risks.

Profits to y’all!