After the ECB meeting on September 10, the market considered it highly likely that the ECB would raise rates three more times by the end of the year. However, after the Fed meeting, the market revised its view.

After the Fed raised the target range for the federal funds rate by 25 bp on September 17, the narrative surrounding the interest rate differential changed. Previously, the market had traded on the theme of "the Fed cuts rates, while the ECB raises them," expecting the differential to narrow in favor of the euro. Now both central banks are raising rates, but the Fed turned out to be more hawkish than the market had expected, and the differential may shift further in favor of the dollar. The ECB is expected to raise rates once more in October or December, but the Fed's dot plot has already indicated another rate hike by the end of the year. The policy gap between the two central banks has roughly remained at the level seen before the Fed's action, and the euro has lost one of its key supporting factors.

We should also note the structural damage to Europe caused by the energy shock. The impact of the conflict in the Middle East on Europe is much stronger than on the United States. Europe is a net importer of energy, while the United States is a net exporter, and high energy prices even encourage investment in U.S. shale gas. This structural asymmetry means that the longer the energy crisis lasts, the greater the gap in economic growth between the United States and Europe becomes.

At present, the resilience of the eurozone economy is exceeding expectations, which is a factor in favor of the euro. The ECB has slightly raised its growth forecasts for 2026 and 2027, while the industrial sector is benefiting from increased government spending on defense and corporate investment in AI. Exports are also growing. The ECB's assessment also shows that long-term inflation expectations among professional forecasters remain at 2%, while price increases by companies and consumers are limited, meaning that long-term expectations are "generally well anchored." This supports the ECB's credibility.

The net short position in the euro has declined to 3.9 billion, but the estimated price is still moving lower.

A week earlier, we expected EUR/USD to remain above the 1.1510/20 support level until the Fed meeting, and indeed, the breakout occurred after the Fed signaled a more hawkish stance than before. The interest rate differential no longer supports the euro, the probability of renewed growth has decreased, and upside potential is limited by the 1.1510/20 level. A decline toward 1.1410/20 appears more likely.