Key Takeaways
The euro depreciated more than 1.4% against the US dollar this week, breaking below key moving averages and threatening a deeper decline toward the 1.1600 handle. The move comes as surprisingly strong US inflation data and rising oil prices fuel a broad-based rally in the dollar.
"Stagflation concerns are weighing on risk appetite," Fawad Razaqzada, an analyst at City Index, said in a recent note. "If oil continues climbing from here, expect even greater pressure on the EUR/USD, as well as European equities and other risk assets."
The US Dollar Index (DXY) firmed 0.5% to trade above 99.20, its highest level in weeks, driven by a surge in Treasury yields. The 10-year US Treasury yield climbed to a 10-month high of 4.59% after data showed US consumer prices accelerated to 3.8% year-over-year in April, beating consensus estimates and fueling bets the Federal Reserve may hike rates in 2026.
The sharp repricing of Fed expectations creates a stark policy divergence with the European Central Bank, which faces a greater stagflationary threat from energy prices. With the Strait of Hormuz remaining shut and Brent crude approaching $110 a barrel, the economic outlook for the Eurozone is darkening, suggesting the path of least resistance for EUR/USD is lower in the near term.
The dollar's strength was initially triggered by Tuesday's Consumer Price Index report, which showed core inflation also climbing to 2.8%. The market reaction was decisive, with CME FedWatch probabilities for a 2026 Fed rate hike jumping more than 12 percentage points to 35.6%. The subsequent Producer Price Index release further solidified the inflation narrative. Compounding the economic data, geopolitical tensions in the Middle East are providing a dual boost to the dollar through both safe-haven flows and higher energy prices. President Trump’s recent comments that the US-Iran ceasefire is on "massive life support" have stalled hopes for a quick resolution and kept upward pressure on crude oil.
From a technical perspective, the EUR/USD's failure to break above major resistance at the 1.1800 handle triggered the sharp reversal. The subsequent break below the 1.1700 support level, which coincided with the 200-day moving average, was a significant bearish signal. The pair is now targeting the next major support zone around 1.1600, the origin of the breakout seen in early April. A decisive break below this level would open the door for a deeper correction toward 1.1500.
This article is for informational purposes only and does not constitute investment advice.
