The September Trap for EUR/USD: Who Really Controls the Pair?
The Fed and ECB enter autumn with hawkish rhetoric, but EUR/USD will be driven not by rates themselves, but by how far central-bank decisions differ from what the market already expects.
At first glance, everything looks simple: the ECB is likely to raise rates on 10 September, while the Fed will decide on 15-16 September. But FX markets trade not the decisions themselves, but the gap between those decisions and what has already been priced in.
First clue – NFP.
The US economy added 162,000 jobs in August versus expectations of around 56,000. July was revised from -23,000 to +21,000, while unemployment stayed at 4.1%. The first reaction was hawkish: the probability of a September Fed rate hike rose from 55% to 65%, 2-year Treasury yields moved towards 4.41%, 10-year yields towards 4.80%, and EUR/USD fell to around 1.1585.
But wage growth was weaker than expected. The probability of a rate hike then slipped back to around 57%, the dollar and Treasury yields gave back part of their initial move, and EUR/USD recovered above 1.1600, reached 1.1625 and stabilised near 1.1610.
This second move was more important than the first. Strong NFP confirmed that the labour market remains resilient, but it did not settle the question of a September rate hike. Christopher Waller had also said a day earlier that rates could remain unchanged. The main missing clue is now US inflation: it will show whether strong employment outweighs slower wage growth.
Second clue – the ECB has left almost no room for surprise.
Eurozone inflation accelerated to 3.3% in August, compared with the ECB’s 2% target. Reuters surveyed 65 economists, and all 65 expect the ECB to raise the deposit rate by 25 bp on 10 September, from 2.25% to 2.50%.
But if this is already priced in, the hike itself may not support the euro. Most economists expect it to be the last hike in the cycle, with the rate remaining at 2.50% at least until mid-2027. Eurozone growth in 2026 is expected at only 0.8%. The ECB may therefore raise rates and at the same time explain why it does not plan to raise them further. For the euro, this is a classic “buy the rumour, sell the fact” setup.
Main insight
EUR/USD is now trading expectation errors rather than rates. If the ECB raises to 2.50% and Lagarde signals that the cycle is over, the euro may weaken. The Fed faces the opposite situation: a September hike is only partly priced in. Higher-than-expected US inflation could lift the probability of a hike from 57% to 80-90% and give the dollar a stronger impulse than the expected ECB hike gives the euro. This is the September trap.
Third clue – oil.
Brent rose above $97 per barrel, while tensions around Iran and the Strait of Hormuz increased inflation risks. For the ECB, expensive oil raises inflation but also hits real incomes and growth. The US also faces oil-driven inflation, but strong NFP showed that the American labour market is holding up better. The same oil shock may be hawkish for both central banks, but fundamentally more dangerous for the euro.
This gives three scenarios:
Bullish: the ECB raises rates and leaves the door open to further tightening, while US inflation allows the Fed to pause – EUR/USD could test 1.18-1.20.
Base case: the ECB raises to 2.50% but signals no further hikes for now, while the Fed keeps uncertainty alive – EUR/USD may stay in the 1.15-1.18 range.
Bearish: the ECB effectively ends its cycle, while strong US inflation makes a Fed hike almost inevitable – 1.15 comes under pressure, followed by 1.12-1.13.
The main question in September is not who raises rates, but who surprises the market more. The ECB has almost shown its cards. The Fed has not.
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