What policy divergence and politics mean for EUR USD in September 2025

Many predict EUR USD will enter September at a critical juncture as traders weigh policy divergence between the Federal Reserve and European Central Bank alongside rising political risk in Europe. Based on recent data, the pair has pulled back from last week’s post-Jackson Hole rally, with the euro pressured by French political turmoil while the dollar finds short-term support in higher yields. The key question is whether September’s data and central bank meetings will confirm a sustained rebound for the euro or extend dollar dominance.

Key takeaways

• Fed expected to cut rates on 17 September from 4.50 to 4.25 as labour market weakness deepens.
  
  
• ECB likely to hold deposit rate at 2.00 on 10 September with inflation back at target.
  
  
• Political uncertainty in France adds pressure on the euro ahead of a 9 September confidence vote.
  
  
• EUR USD trading near 1.1630 with volatility compressed ahead of data releases.
  
  
• Breakout risk rising as September meetings and data could realign rate expectations.
  
  

Fed ECB interest rate difference

The ECB’s current position reflects stabilisation in inflation and a more balanced economic outlook. July’s consumer price index showed a 2 per cent annual increase, perfectly in line with the ECB’s target. 

This marks a significant improvement from the 2022–2023 inflation spike, when eurozone CPI ran above 8 per cent and forced aggressive hikes.

At Jackson Hole, Christine Lagarde stressed that the ECB will monitor economic indicators closely rather than commit to further tightening. She pointed to factors such as migration, supporting labour markets and steady wage growth as reasons why the eurozone economy remains stable despite high rates.

Markets now see an 87 per cent probability of a hold at the 10 September meeting. 

The deposit rate is widely expected to stay at 2.00, with the ECB essentially signalling that policy is neither restrictive nor accommodative - a wait-and-see stance. For traders, this means the euro has no immediate rate-driven catalyst, leaving the focus squarely on external drivers like the Fed.

Fed rate cut decision

The contrast with the Federal Reserve is stark. The US labour market, once a pillar of strength, is showing visible cracks.

 July’s nonfarm payrolls report added just 73,000 jobs, far below the 200,000+ average seen through 2023–24. Unemployment ticked up to 4.2 per cent, and wage growth has slowed.

Jerome Powell acknowledged this slowdown at Jackson Hole, marking his first major shift in tone this year. He noted that inflation appears “more contained” and that the Fed’s priority is now employment and sustaining growth. 

This pivot sets the stage for a potential rate cut on 17 September, with CME FedWatch showing an 87 per cent probability of a reduction to 4.25 per cent. If confirmed, this would be the first cut of the 2025 cycle - a major turning point in policy.

 For EUR USD, it would narrow the interest rate gap that has supported the dollar for the past two years. The short-term question is whether the Fed moves aggressively in September or adopts a slower, gradual path.

French political risk to the euro

On the European side, politics adds a layer of complication. Prime Minister François Bayrou faces a confidence vote on 9 September, with opposition parties united against his €44 billion budget plan. A failure to pass the vote would threaten the stability of his minority government, potentially forcing coalition talks or even new elections.

Markets reacted quickly: the CAC 40 fell 1.7 per cent earlier this week, and French bond spreads widened against German Bunds. Political instability weighs directly on the euro by undermining investor confidence in European assets at a time when the ECB is trying to project stability.

This dynamic contrasts with the US, where political risk has emerged in the form of central bank independence. President Donald Trump’s dismissal of Fed Governor Lisa Cook over mortgage allegations has raised concerns about political interference in monetary policy. While the dollar initially shrugged this off, institutional credibility could become a medium-term drag if independence is seen as compromised.

EUR USD volatility: Drivers to watch

September is packed with data releases that will shape rate expectations:

• This week:
  
  
  • US consumer confidence (expected at 98, up from 97 in July).
    
    
  • House price index and durable goods orders for insight into household and business investment.
    
    
  • Richmond Fed manufacturing index for regional activity.
    
    
  • GDP (second estimate) for Q2 growth momentum.
    
    
  • PCE inflation report, the Fed’s preferred measure, to confirm whether price pressures are easing.
    
    
• Next week:
  
  
  • August nonfarm payrolls. Another weak print would seal expectations for a cut.
    
    
• The following week:
  
  
  • CPI data just before the Fed meeting, crucial for judging the inflation trajectory.
    
    

Each release has the potential to shift EUR USD. Stronger consumer confidence or GDP could reduce the urgency for Fed cuts, while weak data would do the opposite.

Market impact and scenarios

• Euro bullish case: Fed cuts rates in September, ECB holds steady. Yield gap narrows, lifting EUR USD from its lows.
  
  
• Dollar bullish case: US data surprises to the upside, and the Fed delays cuts. The dollar stays strong while the euro struggles with politics.
  
  
• Mixed case: Fed cuts but French political turmoil intensifies, offsetting gains and keeping EUR USD range-bound.
  
  

For now, EUR USD trades near 1.1607, a level that reflects hesitation rather than conviction. Traders are positioning lightly until September’s events provide direction.

Euro Dollar technical outlook

Technically, EUR USD is consolidating after retreating from last week’s highs. Support is forming around 1.1594, a level that has held in previous sell-offs. A sustained break lower could open the door to 1.1424. On the upside, resistance lies near 1.1724 and 1.1790, which coincides with the recent rally peak.

Momentum indicators suggest that volatility is compressed, with traders waiting for a catalyst. Once September’s data and meetings hit, a breakout in either direction is likely.

Investment implications

For traders, EUR USD is in a holding pattern, but volatility is building. Short-term strategies may focus on range trading between 1.16 and 1.18 until major data releases arrive. Medium-term positioning should prepare for two scenarios:

• Euro rebounds if the Fed cuts and the ECB holds, narrowing the yield spread.
  
  
• Dollar resilience if US data proves stronger than expected, delaying Fed easing.
  
  

French politics adds further uncertainty, meaning September could be decisive for EUR USD. Traders should expect the calm of late August to give way to higher volatility as policy divergence and politics collide.