The EUR/USD pair is experiencing a significant downturn, dropping to 1.1518 during Tuesday’s European session following five straight days of losses. The euro’s weakness indicates a definitive market assessment: the U.S. dollar continues to hold a strong monetary and yield advantage. The decline of the pair from 1.1600 highs early last week to current levels around 1.1520 highlights a significant trend influenced by diminished expectations for Fed rate cuts, ongoing U.S. political instability, and a subdued recovery in Europe. The transition occurred when Federal Reserve Chair Jerome Powell rejected aggressive easing expectations, emphasizing that policy is “data dependent.” In the aftermath of his comments, reports indicated a significant decline in December rate-cut probabilities, dropping to 65% from 94%. This shift propelled the Dollar Index to 99.97, marking its highest level in a month. The 10-year Treasury yield increased to 4.09%, enhancing the attractiveness of the dollar’s carry trade. The European Central Bank has kept its rates steady for the third consecutive meeting, providing no impetus for buyers. The EUR/USD currency pair continues to be firmly positioned within a downward channel that has characterized its price movements since September. The pair is currently positioned beneath all significant moving averages: the 20-day EMA at 1.1608, the 50-day EMA at 1.1582, and the 100-day EMA at 1.1639, indicating that momentum continues to be firmly bearish.
Immediate resistance is positioned at 1.1570–1.1600, where the short-term EMA cluster and channel midpoint converge. A consistent close above this level would be necessary to mitigate the ongoing bearish trend. However, as long as the pair remains below 1.1550, downside pressure continues, aiming for the 1.1450–1.1400 support range. The Parabolic SAR dots are consistently situated above the price line, indicating a strong downward trend. Momentum oscillators indicate a constrained recovery—RSI hovering around 34, MACD firmly in negative territory—both reinforcing the dominance of sellers. If EUR/USD surpasses 1.1450, the subsequent key level appears at 1.1386, aligning with the 200-day EMA (1.1399) and the previous demand zone from May. A decline beneath this threshold could reveal levels of 1.1350–1.1300, indicating a possible five-month low and a complete retracement of the summer rally. The main factor contributing to the pair’s decline is the divergence in policies between the U.S. and the Eurozone. Federal Reserve officials have maintained their flexibility, whereas the European Central Bank seems to be constrained by decelerating growth and stagnant wage momentum. Recent data indicate Eurozone GDP growth at a mere 0.2% QoQ, alongside headline inflation decreasing to 2.6% YoY, both factors weakening the argument for additional tightening.
The resilience of the U.S. macroeconomic landscape continues to hold firm across the Atlantic. The ISM Manufacturing PMI increased to 51.4, marking its first expansion in almost a year, while U.S. job openings reached 9.47 million, contrary to slowdown predictions. The data presented not only supports the Fed’s prudent approach but also enhances the dollar’s yield differential advantage—currently at 1.82% over German 10-year Bunds, marking the widest gap since August. Meanwhile, Francois Villeroy de Galhau and Martins Kazaks maintained a measured stance, recognizing that inflationary risk has lessened but refraining from indicating any potential easing. Their neutrality did not counterbalance Powell’s decisiveness, resulting in EUR/USD being susceptible to additional declines. The current stalemate in the U.S. government shutdown has unexpectedly increased demand for the dollar, as investors are looking for liquidity in the face of political uncertainty. Despite the impasse in Washington posing risks to fiscal operations, global investors continue to view Treasuries as the safest asset available. The Dollar Index experienced an increase of nearly 0.7% week-to-date, attributed to this “liquidity premium.” At the same time, the aversion to risk in the equity markets—evidenced by the S&P 500 declining 0.75% to 6,800.83 and the Nasdaq decreasing 1.3% to 16,278.22—has resulted in increased inflows into USD. The inverse correlation of the EUR/USD pair with U.S. yields and equity risk has reemerged, intensifying the bearish momentum.
The euro experienced continued pressure from domestic data. The Eurozone Manufacturing PMI remained at 45.6, marking its 18th consecutive month below the neutral threshold of 50. Additionally, Germany’s factory orders experienced a decline of 2.1% month-over-month, highlighting ongoing challenges in the industrial sector. Despite the ZEW Economic Sentiment Index rising slightly to –3.2 from –8.9, this improvement is still too minimal to influence capital flows significantly. Even more concerning, core CPI has decelerated to 2.8% YoY, a decrease from 3.0%, indicating that inflationary pressures are diminishing more rapidly than anticipated. The outcome presents a policy dilemma for the ECB—incapable of tightening yet hesitant to ease—resulting in the euro’s path being dictated by the dollar. The Commitment of Traders data indicates that speculative accounts have increased their short positions on the euro. Net shorts rose by 18,400 contracts to –62,700, indicating the most significant bearish positioning since May. This corresponds with the Euro Index’s 0.9% weekly decline, underscoring ongoing capital rotation away from Europe. Retail positioning through IG Client Sentiment indicates that 68% of traders are long on EUR/USD, presenting a contrarian bearish signal that suggests the possibility of another downward movement. Meanwhile, the option volatility skew has adjusted in favor of puts, with 1-month EUR/USD risk reversals at –1.45, indicating the most significant downside bias observed in the past three months.
The descending structure observed on the 4-hour chart illustrates a clearly defined bearish channel, with resistance positioned at 1.1600 and support located around 1.1450. The median line at 1.1520 has consistently limited rebound efforts. A definitive close beneath 1.1500 validates the breakout, indicating a projected move to 1.1380 derived from the extension of the channel width. The volume data supports this movement: spot FX turnover increased by 14% week-over-week, fueled by significant selling interest from institutional desks in London and New York. The Euro’s 10-day average true range has increased to 0.0082, reflecting a rise in volatility that aligns with momentum-driven selling activities. Year-to-date, the euro has positioned itself among the underperformers in the G10 currency group, declining by 2.7% against the USD and 4.3% against the CHF. EUR/JPY is currently trading at 177.45 against the yen, maintaining stability as a result of Japan’s ultra-dovish policy stance. In the wider cross-market analysis, the euro’s weakness is particularly evident against high-yield counterparts: EUR/AUD decreased by 1.1% this week, EUR/NZD fell by 0.8%, and EUR/CAD saw a decline of 0.5%, indicating a clear trend of underperformance. Market participants are preparing for the forthcoming ADP employment figures and U.S. CPI statistics, both essential for determining the Federal Reserve’s direction. A strong jobs report may reinforce the Fed’s decision to pause, potentially driving EUR/USD down past 1.1450, whereas weaker data could lead to a rebound towards 1.1600.
Until that time, technical momentum, positioning, and macro divergence all support the dollar. A decisive break above 1.1650 is necessary to challenge the prevailing bearish setup. Given the technical and fundamental convergence, EUR/USD is experiencing significant selling pressure, with no immediate indicators of a reversal. The breach of 1.1500 creates a pathway towards 1.1450–1.1400, and consistent closes below 1.1450 could reveal levels at 1.1380–1.1300 in the weeks ahead. Provided that the Fed continues to adopt a data-driven approach and yields stay above 4.0%, the supremacy of the dollar remains intact. The euro’s potential for recovery is fundamentally dependent on either a disappointing U.S. data release or a shift in policy from the Fed—both of which do not seem to be on the horizon at this time.