During the Asian trading session on Wednesday, the Euro against the US Dollar is poised for a third consecutive day of decline. It touched a low of 1.1360, its weakest level in over a year, and is currently trading near 1.1365, down approximately 0.15% for the day.
Driven by a robust US Dollar, the Euro continues to face significant downside risks.
Rising Fed Rate Expectations and Broad Dollar Strength
The primary driver behind the Euro's persistent weakness is the broad-based strength of the US Dollar. Market expectations for a Federal Reserve interest rate hike this year to combat persistent inflation have been steadily increasing, providing core support for the greenback.
According to the latest data from the CME FedWatch Tool, traders are now pricing in an approximately 86.1% probability of a Fed rate hike by December, a sharp increase of 25 percentage points from last week. This significant shift is largely fueled by recent US data exceeding expectations, including strong retail sales, manufacturing PMI, and robust labor market figures. These indicators suggest the US economy is more resilient than anticipated, with a slow but controlled path for inflation decline, easing investor concerns about a hard landing.
Recent hawkish signals from several Federal Reserve officials have further solidified market expectations, leading traders to significantly scale back their forecasts for the number of rate cuts this year. In this environment, the interest rate differential between the US Dollar and other major currencies has widened notably, attracting global capital flows into dollar-denominated assets and pushing the US Dollar Index to a 13-month high.
In contrast, the pace of economic recovery in the Eurozone remains relatively sluggish. Although the European Central Bank maintains a relatively hawkish stance, its support for the Euro is significantly overshadowed by the divergence in monetary policy compared to the Federal Reserve.
Traders are currently focused on whether the US-Europe interest rate differential will widen further, which is directly contributing to sustained pressure on the Euro in the EUR/USD cross. Short-term downside risks remain prominent.
US-Iran Nuclear Tensions Maintain Geopolitical Risk Premium
Simultaneously, contradictory statements from the US and Iran regarding Iran's nuclear program are sustaining a geopolitical risk premium, further boosting demand for the US Dollar as a safe-haven asset.
While the US President has asserted that Iran has "fully agreed to accept the highest level of inspections indefinitely," Iran's Foreign Ministry swiftly denied making any new commitments regarding nuclear facility inspections during talks in Switzerland, highlighting a severe contradiction in their respective positions.
This information asymmetry directly amplifies market doubts about the reliability of any agreement's implementation. Even with the Strait of Hormuz reopening and sanctions exemptions being granted, disputes over inspections could still introduce new uncertainties within the 60-day roadmap.
Analysts note that the nuclear issue, being a core conflict in the Middle East, injects lasting uncertainty into global energy markets and risk asset pricing. This prompts investors to increase holdings of traditional safe-haven assets like the US Dollar. The Dollar Index's strong performance, driven by this risk-averse sentiment, has completely overshadowed any potential support for the Euro from ECB policy.
In the short term, if subsequent IAEA technical talks fail to make progress or regional conflicts, such as those in Lebanon, show signs of recurring, the geopolitical risk premium could push the US Dollar even higher.
Investors should closely monitor the latest statements from the US administration, official responses from Iran, and updates from relevant international bodies, as these factors will directly influence the Dollar's safe-haven appeal and the Euro's trajectory.
Institutional Perspectives
JPMorgan Chase views the macro environment as turning increasingly favorable for the US Dollar while the negative factors for the Euro intensify. Key drivers include a widening growth divergence between the US and Europe, with US data showing more resilience compared to relative Eurozone weakness; a hawkish shift in Fed policy, supported by a stable labor market and inflation surprises boosting rate hike expectations; and deteriorating Eurozone trade conditions, such as energy price impacts from geopolitical conflicts, coupled with weaker relative stock market performance.
Mitsubishi UFJ Financial Group expects the US Dollar to weaken further by 2026, supporting a gradual rise in the EUR/USD pair. Under its baseline scenario, the Federal Reserve's gradual easing cycle, influenced by factors like the labor market, will narrow yield differentials. Additional support for the Euro is anticipated from German spending and European fiscal dynamics. Although European political risks, such as concerns over French finances, may limit gains, the overall trend of capital flows into European bonds and equities is viewed as favorable.
Technical Analysis
On the daily chart, the EUR/USD pair continues its one-sided downtrend, with a clear bearish bias. The moving average system has turned into a pattern of resistance. The price has decisively broken below the MA20, MA50, MA100, and MA200 moving averages. The short-term MA20 at 1.1542 and the medium-term MA50 at 1.1635 now form layered overhead resistance. The medium- to long-term moving averages are turning downward, indicating strong downward momentum.
The MACD indicator shows the DIFF line at -0.0062 remaining below the DEA line at -0.0044, with the green bearish momentum bar expanding, signaling continued selling pressure and no immediate golden crossover signal for a pause in the decline. The RSI indicator has fallen to 27.38, approaching the oversold threshold of 20, suggesting a weak potential for a technical rebound in the short term. However, this does not alter the overall bearish structure.
In terms of price action, the pair has been weakening gradually since facing resistance from a double-top pattern at 1.1848. It has successively broken below the key platform support at 1.1649 and probed the recent low of 1.1360. The previous support level at 1.1410 has been effectively breached, with no strong support zone immediately below, further opening the door for downside movement. The first resistance level above is the MA20 at 1.1542, followed by the previous consolidation platform at 1.1649.
As of 13:58 Beijing Time, the Euro against the US Dollar was quoted at 1.1365/66.
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