Euro weakens below 1.1350 on higher US Treasury yields, Lagarde's dovish tilt
- EUR/USD weakens to near 1.1325 in Thursday’s early Asian session.
- US PCE inflation rose less than expected in August, reducing expectations for a Fed rate hike this month.
- ECB’s Lagarde stressed the central bank should adopt a “measured response” given no evidence of second-round effects.
The EUR/USD pair drifts lower to around 1.1325 during the early Asian trading hours on Thursday. The US Dollar (USD) strengthens against the Euro (EUR) amid an extended rise in US Treasury yields. The US weekly Initial Jobless Claims report and the Fedspeak will be the highlights later in the day.
The US Personal Consumption Expenditures (PCE) Price Index increased 0.3% MoM in August, putting the 12-month gain at 3.4%, the Commerce Department's Bureau of Economic Analysis showed on Wednesday. These figures came in softer than the expectation. Excluding food and energy, PCE posted a 0.2% rise that put the annual core level at 3.0%. The respective forecasts were for 0.3% and 3.3%.
According to the CME FedWatch tool, traders are pricing in a 38.2% chance of a quarter-point rate hike next month, down from 51% a day ago. Traders are still expecting another hike in December despite the softer inflation data Wednesday.
The scaling back of bets for a Fed rate increase in the October policy meeting prompted a slight retreat in shorter-dated US Treasury yields, but 10- and 30-year bond yields still reached new highs overnight.
Across the pond, European Central Bank (ECB) Christine Lagarde said on Tuesday that rising bond yields will curb economic expansion and limit the transfer of elevated energy costs to inflation. She added that the central bank should adopt a “measured response as appropriate to keep inflation in check” with second-round effects so far absent.
TD Securities sees mildly restrictive ECB path supporting bullish EURUSD view
According to TD Securities, “resilient growth and persistent inflation pressures” are likely to keep the ECB focused on “returning rates to mildly restrictive territory,” with the bank expecting the Governing Council to “deliver a final 25bp hike in December, taking the deposit rate to 2.75%.” In their view, “underlying economic data and inflation indicators remain broadly consistent with a measured tightening cycle aimed at moving policy into mildly restrictive territory.”
On the market side, TD highlights that “OIS markets are currently pricing around 31bp of ECB tightening by end-2026 and close to 100bp cumulatively by end-2027, taking the terminal rate to nearly 3.5%, well above the 2.5% neutral rate referenced by several ECB policymakers.” They stress that “neither we nor the broader consensus expect the ECB, or other major central banks, to validate the full extent of current market pricing.” Against this backdrop, TD says it “maintain[s] a bullish EURUSD year-end forecast” and has “recently expressed the view via 3m risk reversal to fade the broad-based USD rally.”
Kashkari questions policy tightness as resilient economy keeps Fed hawkish
Fed's Kashkari speech scores 7.1/10 on the FXS Speechtracker, notably above the 6.2/10 historical average, underscoring a firmer hawkish tone relative to the established baseline. By stressing that inflation remains “still too high” around 3% and highlighting a resilient economy with strong spending and employment, the remarks reinforce the case for keeping policy restrictive and even contemplating a higher neutral rate. The explicit penciling in of one more hike this year and another in 2027 signals a willingness to extend the tightening cycle if growth and inflation remain robust.
The FXS Fed Sentiment Index slipped by 0.42 points to 143.28, indicating a modest pullback in perceived hawkishness despite staying deep in hawkish territory. With the index well above the neutral 100 mark, the combination of a stronger-than-average FXS Speechtracker score and Kashkari’s openness to further hikes keeps the Dollar supported, even as markets reassess the pace and extent of future tightening.
Technical Analysis: EUR/USD maintains a bearish tone with oversold condition
In the daily chart, EUR/USD keeps a clear bearish near-term bias as spot holds beneath the 100-day simple moving average (SMA) and the Bollinger middle band. Price is pressed towards the lower end of the recent range, with the Bollinger lower band offering the closest technical floor, while the upper band marks the distant top of the current volatility envelope. The Relative Strength Index (14) at 22.5 sits deep in oversold territory, hinting that while downside pressure persists, the sell-off could be nearing exhaustion.
On the downside, immediate support is located at the Bollinger lower band around 1.1270, where bears may start to book profits or where fresh buying interest could emerge. On the topside, initial resistance appears at the Bollinger middle band near 1.1483, followed by the 100-day SMA at 1.1515, a more important barrier for any recovery attempt; a sustained break above these would be needed to ease the current bearish structure, with the upper Bollinger band around 1.1700 remaining a more distant objective.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.