EUR/USD Rally Builds as Fed Cuts Rates and USD Weakens

• Fed cut and Powell’s dovish tone weakened the dollar, giving EUR/USD room to rally.
• Euro strength reinforced by ECB policy contrast and risk-on flows as markets priced relative divergence.
• Technical confirmation above 1.1788 FVGs sets the stage for continuation toward 1.1900–1.1930, while 1.1750 remains the key downside pivot.

Fed Policy Anticipation Driving Euro Upside

With the Federal Reserve widely expected to cut rates by 25 bps later today, traders have been positioning ahead of the announcement. The U.S. dollar has weakened steadily into the event as the labor market softens and recession risk builds, creating tailwinds for EUR/USD.

Even though inflation remains above the Fed’s 2% target, the pressure from rising unemployment has pushed policymakers toward easing. Markets are less concerned about today’s cut itself - which is priced in - and more focused on Powell’s forward guidance.

• Dovish tone: signals more cuts to come, extending USD weakness and fueling further euro gains.
• Cautious tone: stresses inflation risks, which could limit upside and trigger a near-term pullback.

Drivers Behind Euro Strength

With the Fed officially delivering the 25 bps rate cut, EUR/USD sustained its bullish momentum as markets priced in a more accommodative policy stance. Several drivers stood out in reinforcing euro strength:

1. 1. Dollar Weakness Broadens
   • The rate cut, paired with Powell’s acknowledgment of labor market softness, weakened U.S. yields further.
   • The dollar index (DXY) extended its decline, pushing capital flows into other majors, particularly the euro.

1. 2. ECB’s Policy Contrast
   • While the European Central Bank is also cautious, it has shifted toward a “higher for longer” narrative on inflation

• This contrast made EUR/USD attractive, as relative policy divergence now favors the euro.

1. 3. Risk-On Sentiment Post-Fed
   • Equities rallied on expectations of easier U.S. policy, reinforcing demand for higher-yielding assets.
   • The euro benefited from cross-flows as investors rotated out of USD cash into risk assets.

1. 4. Technical Alignment with Fundamentals
   • The reclaim of the 1.1788 breakout pivot and expansion above 1.1850 validated that structural demand zones were being respected.

• Bullish technical structure provided the perfect backdrop for the fundamental drivers to extend the move higher.

Together, these drivers created a synchronized push, making the euro’s strength not just a short-term reaction, but part of a broader macro shift in positioning.

Technical Outlook: EUR/USD Ahead of the Fed

EUR/USD has surged strongly above 1.1788, breaking through prior liquidity and leaving behind multiple bullish FVGs as price structure shifted decisively higher. The pair is now consolidating near 1.1850, awaiting the Fed decision.

Before the Move: Bullish Setup Identified

On the 4H chart, price reclaimed key bullish FVGs around 1.17–1.172, confirming a structural shift to the upside.

• The consolidation under 1.1788 was the decision point: either distribute lower or use the reclaimed demand as a launchpad.

• The bullish scenario called for:

Price to confirm structure by holding above the 4H FVGs.

Retest demand zones as support before expanding higher.

Upside targets at 1.1850–1.1870, with an extension toward 1.1900–1.1930.

This was the pre-Fed bullish gameplan: hold the FVGs → confirm structure → expansion higher.

After the Move: Bullish Scenario Played Out

Price did exactly that: after confirming structure on the 4H FVGs, EUR/USD rallied through 1.1788 and expanded toward the 1.1850–1.1880 zone.

• The confirmation candle on the 4H provided the green light for continuation, validating the bullish narrative.

• Momentum aligned with fundamentals: markets front-ran the Fed’s expected rate cut, weakening the USD and pushing EUR/USD into fresh highs.

• The sequence was clean:

1. Break of structure → Retest into FVGs → Expansion.

Bullish Scenario: Continuation Toward 1.1900–1.1930

If the Fed cuts and delivers a dovish press conference:

• Retests of 1.18215–1.18580 act as demand.
• Upside breakout could extend into 1.1900, with stretch targets at 1.1930.

Bearish Scenario: Pullback if Fed Stresses Inflation

If Powell signals caution and emphasizes inflation risks:

• EUR/USD could face rejection near 1.1850–1.1870.
• A break back below 1.18215–1.18580 signals weakness, exposing the 1.1750–1.1741 zone.
• A sustained breakdown here risks a deeper pullback into 1.1700–1.1680.

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