After last week, traders in EUR/USD failed to decide on a clear price direction, finishing Friday's session near the boundaries of the 1.16 figure. The week's key events (the European Central Bank's September meeting and U.S. CPI/PPI releases) did not "resonate" and failed to form a sustained price impulse. The ECB proved "not hawkish enough" for buyers, while U.S. inflation data, despite stronger overall price pressure, largely came in line with forecasts. Moreover, most inflation acceleration was concentrated in the energy component, while core measures showed more moderate dynamics (for example, core PPI even slowed month on month).

As a result, EUR/USD buyers could not approach the 1.17 area, and sellers, in turn, could not secure a close below support at 1.1570 (the lower line of the Bollinger Bands on the daily chart). So now all market attention is focused on the Federal Reserve's September meeting on September 15–16. In the current fundamental context, the Fed may act as an "arbiter" in the confrontation between EUR/USD buyers and sellers.

According to the CME FedWatch tool, the probability of a 25 bps hike at the September meeting is now 87%. At the same time, hawkish expectations about further Fed actions are rising — the chance of an additional hike by year-end is estimated at roughly 50%.

At first glance, the present balance of monetary expectations clearly weighs against EUR/USD. But there is another side to the coin. Excessively high trader expectations can work against the dollar if the central bank "fails to meet those hopes." For sustainable further dollar strength, the Fed needs more than a single rate hike in September. Judging by CME FedWatch, the market is prepared for that initial step. Crucial support for the greenback will come not only from the decision itself but from the signals that follow. The Fed must either clearly signal readiness for further tightening or at least leave room for it.

Will the Fed transparently hint at continuing the hiking cycle? That remains an open question. In my view this is the main risk for EUR/USD sellers. Given genuinely elevated inflation, other elements of the macro picture look far less unequivocal.

Yes, on one hand, August NFP was fairly strong: the U.S. economy added 162,000 jobs, and the unemployment rate remained at 4.1%. Yet average hourly earnings rose only 0.3% month-on-month and 3.1% year-on-year. This indicates that the wage component — a pro-inflationary indicator — is not accelerating.

Employment components in business surveys raise further questions. In the manufacturing ISM, the employment index fell from 52.8 to 51.2. The services side looks even weaker: the corresponding subindex stood at just 47.8, in contraction for the second month running. Meanwhile, the headline indicator remains in expansion and shows upward dynamics. In other words, this is not a recession story but a weakness in hiring amid ongoing business activity.

Finally, one cannot ignore growth rates. According to the second estimate, US GDP in Q2 rose only 1.5% year-on-year, after a 2.1% increase in the previous quarter. This is certainly not a recessionary scenario, but the combination of accelerating inflation and slowing economic activity creates a hypothetical risk of stagflation.

In other words, on one side of the scale are inflation and an energy shock; on the other are slowing economic growth and mixed signals from the labor market.

Under these fundamental conditions, the Fed is unlikely to take an "ultra-hawkish" stance (a rate hike plus clear hints of further tightening). In my view, the most likely scenario is a moderately hawkish position (a rate hike plus cautious commentary). That outcome could exert significant pressure on the dollar. The market has already moved too far in its expectations: for a new impulse to the greenback, the Fed would need to deliver a stronger signal than what's already priced in.

If we talk macro releases next week, pay attention to the ZEW indices. After raising rates at its September meeting, the ECB effectively left the door open to further tightening, while stressing that decisions depend on incoming data. Therefore, almost every significant euro-area macro report will now be assessed through that prism. The ZEW indices are no exception.

Recall that August reports were fairly strong: the German index rose to 34.2 (from 26.3 a month earlier), and the euro-area measure rose to 31.4 from 23.4.

Most analysts expect the ZEW indices to turn negative in September: the German index is forecast to fall to about 21, and the euro-area index to about 19.

However, such a result would not necessarily be a "verdict" for the euro. Remember the latest PMI data, which painted a rather optimistic picture: euro-area composite PMI rose to 52.1 in August, the manufacturing index climbed to 52.8, and employment returned to growth for the first time since the start of the year. So if September's ZEW is lower than August's but remains in positive territory (i.e., above zero), the market will likely interpret that outcome as a correction of excessively optimistic expectations rather than a signal of a new wave of economic problems.

In other words, strong September ZEW readings could provide short-term support for the euro, while a weak ZEW would be unlikely to justify a reassessment of expectations about further ECB action.

Thus EUR/USD's fate next week depends almost entirely on the Fed. A September hike is already largely priced in, so the decisive factor will be the tone of accompanying Fed rhetoric and hints about further steps. Until the Fed's statement is published, the pair will most likely continue range trading within 1.1570–1.1650 (the daily Bollinger Bands lower line — the 4-hour Bollinger Bands upper line). The subsequent price vector will depend on the Fed's position as the "arbiter."