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

The EUR/USD currency pair experienced slight declines in early Asian trading hours on Friday, with the US Dollar (USD) gaining strength against the Euro (EUR). This was due to increased expectations of Federal Reserve (Fed) policy hikes and ongoing tensions between the United States and Iran. The 30-year US Treasury bond yield reached a high of 5.501%, while the 10-year yield climbed to 5.223%, both levels not seen since 2004 and 2007 respectively.

This surge in bond yields fueled bets on additional Fed rate hikes. Philadelphia Fed President Anna Paulson highlighted that further tightening might be required if the economy follows its projected course and that inflation remains significantly above the Fed's 2% target.

Meanwhile, the Middle East situation remained precarious, with Iran and the US conducting talks that showed little progress. Iranian President Masoud Pezeshkian stated that it is up to the US to determine whether to end its conflict with Iran, as Tehran is not interested in further fighting. These negotiations were further complicated by each side's reluctance to relinquish its leverage. Such uncertainty could lead to a preference for safe-haven assets, bolstering the USD and putting downward pressure on the EUR/USD pair.

Scotiabank strategists noted that the EUR still carries a "soft undertone" and that the widening spreads and EU concerns over potential US export bans of diesel continue to weigh on the pair, despite US assurances that no such ban would occur. Germany's IFO survey improved slightly more than anticipated in September, with both the Business Climate Index and Expectations figures rising.

However, the divergence of IFO sentiment from German GDP since 2024, coupled with the lag in sentiment improvement, has been noted. The Fed's William Hammack delivered a hawkish message, with a speechtracker score of 7.4/10, slightly less aggressive than the historical average of 7.6/10. His emphasis on central banks' responsibility for price stability and warnings of persistent high inflation suggested a firm commitment to restrictive policies, which typically supports the USD.

The FXS Fed Sentiment Index dropped by 0.46 points to 148.18, indicating a moderate retreat in hawkishness compared to recent communications. Yet, the index remained well above the 100 neutral mark, signifying that the overall policy tone was still restrictive. Despite the slight softening, the Euro faced a bearish near-term bias as it slipped below the 20-day Bollinger middle band and the 100-day simple moving average (SMA).

Immediate support could be found at the lower Bollinger Band at 1.1355, while the 100-day SMA at 1.1532 and 20-day Bollinger middle band at 1.1535 offered initial resistance, with a more significant barrier at the upper Bollinger Band near 1.1715.