Roughly 80% of the euro’s August advance has been unwound as the dollar strengthened on firmer US rate expectations. EUR/USD rose from around 1.1350 in late July to just above 1.1700 in the second half of August, then slipped below 1.1450 on Tuesday to its lowest since late July before stabilising near that area. The ECB lifted its deposit rate to 2.50% on 10 September, a second increase since the war drove energy costs higher, and futures pricing implies three or four further moves over the next year. Each hike would narrow the 1.375-point gap to the Fed’s 3.875% midpoint, though ECB officials have pushed back against the degree of tightening priced by markets.
Eurozone data have also softened. The European Commission’s flash consumer confidence for September printed at -16.5 versus a -16 forecast and -15.5 in August, while upcoming HCOB PMI figures are expected to ease to 51.5 from 52, with services at 51.7 and manufacturing at 52.7, and Germany’s Ifo survey follows on Thursday. In the US, S&P Global’s flash services PMI is forecast at 56 versus 56.5, and Fed Governor Barr speaks at 14:05 GMT. Technical levels put resistance at 1.1500 and the 50-day EMA near 1.1550, with support just above 1.1400 and near 1.1350; Stoch RSI is under 10, its lowest since mid-March.
Economic Divergence and Central Bank Policy Outlook
We are watching the Euro erase almost all of its August gains as it slips below 1.1450, driven by a surging US Dollar. This downward move reflects a familiar economic divergence, where the US economy historically outpaces Europe. For instance, recent US GDP growth rates of 3.0% have vastly outperformed the Eurozone’s meager 0.2% expansion, giving the Federal Reserve more room to keep rates elevated.
While futures markets are pricing in multiple ECB rate hikes to close the gap with the Fed’s 3.875% midpoint, policymakers are actively pushing back. Both ECB President Lagarde and Vice-President Vujčić have signaled a more measured approach, suggesting that traders are expecting too much tightening. Historically, when central bank actions fail to match aggressive market expectations, the currency suffers.
The latest economic data supports a softer ECB stance, with Eurozone consumer confidence falling to -16.5. Weakening business activity, with the HCOB Eurozone PMI forecast dropping to 51.5, makes aggressive rate hikes even harder to justify. This slowdown means households are spending less, removing the demand-driven pressure the ECB would need to raise rates further.
Trading Outlook and Key Levels
We face a busy calendar of five ECB speeches and crucial business surveys this week, which could spark further volatility. Any comments aligning with Lagarde’s cautious tone will likely strip away the Euro’s remaining support. Meanwhile, the US services PMI is projected to hold strong at 56, highlighting a growth gap that keeps the US Dollar highly attractive.
For derivative traders, we maintain a bearish bias on the EUR/USD pair as long as it remains below the 1.1500 resistance level. Although an extremely low Stochastic RSI under 10 suggests the pair is oversold and could temporarily bounce toward 1.1500, we view these rallies as prime shorting opportunities. We suggest targeting downside support levels at 1.1400 and then 1.1350, while keeping protective stops just above the 50-day moving average at 1.1550.
