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Fewer expected US rate hikes can support the euro, but they do not guarantee it will rise. EUR/USD reflects the expected paths of both the Federal Reserve and the European Central Bank, as well as shifts in currency risk, energy prices, geopolitical events and demand for the US dollar. The European Central Bank’s September 2026 projections offer a recent example: the euro had weakened against the dollar since June even as euro-area short-term market-rate assumptions for 2027 and 2028 were revised upward.
Why fewer expected Fed hikes do not guarantee a stronger euro
EUR/USD is a relative price: it tells you how many US dollars one euro buys. Expectations of fewer Federal Reserve hikes may make dollar assets less attractive relative to euro-area assets, all else equal. But “all else” rarely stays equal. The pair can still fall if expectations for European rates weaken more, if investors demand more compensation for holding euros, or if demand for dollars rises for other reasons.
It also matters whether the change in rate expectations was new. Exchange rates respond to changing expectations, not simply to the number of hikes currently anticipated. A shift already reflected in prices may have little further effect; a surprise about either central bank’s future policy can matter more.
Compare the two expected policy paths
The relevant question is not just whether markets expect fewer US hikes. It is how expectations for future short-term rates in the United States compare with those in the euro area, across the time periods investors care about. An ECB analysis describes exchange-rate levels as reflecting both expected future short-term interest-rate differentials and currency risk premia (ECB, “The international transmission of monetary policy,” 14 November 2019).
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- If expected US rates fall relative to expected euro-area rates, that can support the euro, all else equal.
- If expected euro-area rates fall by more, or remain lower for longer, the relative-rate effect can work against the euro.
- If one or both paths were already priced in, the announcement of fewer expected US hikes may not produce a fresh euro gain.
Market expectations are not central-bank promises. The ECB Governing Council said in its September 2026 Economic Bulletin: “The Governing Council is not pre-committing to a particular rate path.” Policy expectations can change as economic data and risks change (ECB, September 2026 Economic Bulletin).
Risk and geopolitical shocks can outweigh the rate signal
Investors’ willingness to hold a currency can change independently of expected policy rates. A shift in perceived uncertainty or risk appetite may alter the compensation investors demand for holding euros, or prompt them to seek dollars. Those changes can move EUR/USD even when expected rate paths point in the other direction.
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The ECB’s account of its February 2026 meeting illustrates how this can happen: it said most of the euro’s appreciation since December 2025 had been explained by risk shocks that were negative for the dollar, while the effects of euro-area and US policy expectations were smaller and broadly neutral (ECB account of the February 2026 monetary policy meeting). That finding describes that episode; it does not identify the cause of every later exchange-rate move.
Energy prices can affect both the euro outlook and ECB expectations
Energy-price changes can influence the euro-area outlook through inflation, growth and the possible response of monetary policy. Geopolitical events can affect energy markets and investor perceptions of risk at the same time. The ECB’s September 2026 projections discussed energy developments and the Middle East conflict as important sources of uncertainty for the outlook. The ECB also noted that option-implied currency paths were tilted toward euro appreciation, possibly reflecting relative policy expectations and hopes for a resolution of the conflict (ECB staff macroeconomic projections, September 2026).
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These are connected possible channels, not a quantified explanation of a particular EUR/USD move. The projections do not establish that one energy or geopolitical factor caused the euro’s full depreciation since June.
The dollar can strengthen even if the euro outlook is unchanged
Because EUR/USD compares two currencies, the pair can fall when the dollar strengthens, even without a deterioration in the euro-area outlook. The Federal Reserve’s July 2026 Monetary Policy Report said its broad dollar index increased modestly on net from the start of 2026 through 2 July, amid volatility linked to Middle East developments (Federal Reserve, July 2026 Monetary Policy Report). That broad index is context about the dollar against a basket; it is not the same as EUR/USD and does not by itself explain a particular move in the pair.
What the 2026 ECB figures show—and why their dates matter
The ECB’s September 2026 projections reported a 1.0% euro depreciation against the US dollar and a 0.3% depreciation in nominal effective terms since the June projections. At the same time, the September document said euro-area short-term market-rate assumptions for 2027 and 2028 had been revised upward relative to June. This combination shows why a rate-only explanation is incomplete; it does not establish a single cause for the depreciation. The projections’ exchange-rate assumptions used a 19 August 2026 cut-off (ECB staff macroeconomic projections, September 2026).
A separate ECB Economic Bulletin review reported a different move over a different window: from 11 June to 9 September 2026, the euro appreciated 1.0% against the dollar and 0.4% on a trade-weighted basis (ECB Economic Bulletin, September 2026). These figures are not contradictory: the periods and reference dates differ, so they should not be combined as if they measured the same interval.
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The measures also answer different questions. EUR/USD is bilateral; the euro’s nominal effective exchange rate tracks it against a basket of important trading partners. A euro move against the dollar can therefore differ from its broader trade-weighted move.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.A practical way to interpret a euro move
- Set the time window. Identify the dates behind the reported exchange-rate change and the data cut-off. Figures from different periods are not directly comparable.
- Compare both rate paths. Ask how expectations for ECB rates changed relative to expectations for Fed rates, and over which maturities—not just how many US hikes are expected.
- Separate rates from risk. Look for changes in geopolitical or energy risks and investor risk appetite that could alter currency demand or risk compensation.
- Check both currency legs. Consider whether the euro weakened, the dollar strengthened, or both. A broad-dollar measure can provide context but cannot substitute for analysis of EUR/USD.
- Check the exchange-rate measure. Confirm whether the figure is EUR/USD or a trade-weighted euro measure before drawing conclusions about the euro more broadly.
The result is a more accurate reading than treating an expected Fed cut or a smaller number of hikes as a mechanical signal. Rates matter, but they are one part of a relative, forward-looking exchange rate that can also respond to risk and new information.
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