EUR/USD, EUR/JPY: Hawkish Fed Weighs on Euro as Yen Bulls Struggle

The Fed's increasingly hawkish outlook is weighing on EUR/USD as markets price further US rate hikes, while the ECB faces a difficult inflation-growth trade-off. Yet the euro is not uniformly weak, with EUR/JPY's bullish wedge breakout presenting a potential recovery towards 181.50, even as the broader trend remains vulnerable.

 

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Fed–ECB Policy Divergence Pressures EUR/USD as EUR/JPY Eyes Recovery

Fed–ECB Policy Divergence Weighs on EUR/USD

The Fed's increasingly hawkish outlook is weighing on EUR/USD, even though both central banks are expected to raise rates in December. Sticky US inflation has raised the prospect of a larger Fed hike and further tightening into 2027. Meanwhile, ECB policymakers appear increasingly cautious about tightening too far, with a December hike potentially followed by a pause.

The ECB faces a difficult balancing act. Eurozone inflation reached 4% in October, largely driven by energy and food prices, yet those same pressures threaten economic growth. This divergence in central bank expectations favours the US dollar, although recent EUR/USD weakness appears to be more about dollar strength than broad euro selling. French fiscal concerns add another potential headwind for the single currency.

 

 

Hawkish Fed Bets Strengthen as Markets Price Further Rate Hikes

Hawkish Fed bets have been bolstered by stronger-than-expected US CPI, alongside October's solid 165k nonfarm payrolls print and upward revisions to prior months. Adding fuel to the fire, Fed Governor Christopher Waller has opened the door to a 50bp December hike, while Lorie Logan favours at least two further 25bp increases, potentially delivered at a faster pace.

Markets are pricing further tightening from both central banks, with around 60bp of hikes expected over the next six months. While ECB tightening appears more front-loaded, Fed expectations overtake those of the ECB further along the curve, highlighting the importance of relative rate expectations for EUR/USD.

EUR/USD Technical Analysis: Euro Bears Eye 1.1000

On Monday in my weekly COT analysis report, I noted that I had switched from ‘bearish sentiment extreme’ to the likelihood that bears may be on the correct side of the market after all. And that record-levels of net-short exposure revealed on the COT report could be looked past for now. With EUR/USD since breaking to its lowest level since May 2025, bearish momentum is clearly on their side.

And while net-short exposure for large speculators is at a 10-year high, we have seen more extreme levels of net shorts back in early 2015 which leaves the potential for further downside in the coming weeks for EUR/USD.

Support may at hand at the monthly S1 pivot and lower trend channel though, so bears may also need ot tread with caution and seek to fade into rallies. A break of the May low brings the 1.10 handle and lower trend channel into focus.

Source: ICE, TradingView

EUR/JPY Technical Analysis: Bullish Wedge Targets 181.50

The bullish wedge breakout on EUR/JPY remains in play, though it clearly needs a weaker yen to pick up its bullish pace. The bullish reversal pattern projects an approximate target near its base around 181.50, if successful.

The initial breakout two weeks ago confirmed my earlier suspicions that a base had formed around the November 2025 low. The recent pullback following that breakout was then stabilised by a bullish engulfing candle – and higher low – on Monday.

From here, we need a catalyst to drive prices higher. But bulls could also consider setups on dips towards the November 2025 low, as structurally this would still keep the bullish wedge breakout scenario in play, provided support holds.

Further out, the trend points lower on the weekly timeframe so my assumption is EUR/JPY could be headed for 170. But first it needs to decide how deep a retracement higher it wants to present bulls, first.

Source: ICE, TradingView