EUR/USD Forecast: ECB Rate Signal Offsets Energy Headwinds

ECB and Fed Policy Decisions Stabilize EUR/USD

The European Central Bank kept its deposit rate unchanged at 2.50% at its October 29 meeting while softening its policy language, noting stable core inflation and an absence of second-round energy shock effects. Despite an initial sell-off, EUR/USD recovered after ECB President Christine Lagarde confirmed that the Governing Council discussed a potential rate hike before deciding to wait for December economic data.

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Markets interpreted Lagarde's remarks as a signal that a December rate hike is now the baseline scenario, pricing in at least two 25-basis-point increases. Lagarde also noted she will step down on February 7, 2027, ending her term early. Meanwhile, the Federal Reserve also left interest rates unchanged at its October 28 meeting with similar market expectations for future hikes, leaving the Fed-ECB interest rate differential stable and neutral for the pair.

Energy Supply Crisis Pressure Eurozone Growth

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Macroeconomic fundamentals across the Eurozone remain constrained by severe energy sector pressures. European natural gas prices have risen roughly threefold compared to levels prior to the Middle East conflict. According to Gas Infrastructure Europe, EU gas storage fill stood at 74.68% at the end of October—its lowest reading for this date since 2011. Storage levels in Germany reached approximately 61%, significantly below last year's figures and its 70% average norm.

High energy prices continue to compress real household incomes, elevate manufacturing costs, and weaken European industrial competitiveness. Reflecting these headwinds, the Bundesbank indicated that Germany's economy likely stagnated during the third quarter due to elevated energy costs and loss of competitiveness linked to the Middle East and Iran conflicts.

Positioning and Technical Outlook

Institutional market positioning remains predominantly bearish on the single currency. Net short positions on the euro expanded by $1.5 billion during the latest reporting week to -$20.58 billion. While speculative sentiment is firmly negative, heavily short market positioning leaves the pair susceptible to a short-term corrective rebound.

Technically, the central bank decisions allowed EUR/USD to halt its recent decline near lower support. Should the pair clear resistance at 1.1250/70, a corrective push toward 1.1320/40 remains possible. However, the broader long-term outlook remains tilted downward; following a period of consolidation, downside momentum is expected to resume toward support at 1.1066, with a secondary macro target at 1.0905.

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