The euro has come under renewed pressure this week, dipping below $1.13 as a confluence of sluggish eurozone growth indicators, intensifying monetary policy divergence with the United States, and lingering geopolitical strains batter investor confidence. Traders and analysts point to recent economic data showing contractions in key sectors, fresh signals that the European Central Bank (ECB) will press further into rate-cutting territory, and a more resilient US dollar buoyed by relative strength in American bond yields. The result has been a broad-based sell-off in the single currency, as market participants reassess timing and magnitude of central bank actions on both sides of the Atlantic.
Weak Business Activity Fuels Growth Concerns
A preliminary composite Purchasing Managers’ Index (PMI) for May revealed that activity across the eurozone unexpectedly contracted for the first time in several months. Both the services and manufacturing sectors fell below the 50-point threshold that separates expansion from contraction, with weakness most pronounced in business services and export-driven industries. Companies cited subdued demand, elevated input costs, and a drag from recent rounds of US import tariffs that have reverberated through supply chains.
With services accounting for roughly two-thirds of eurozone economic output, the slump in this segment has particularly alarmed economists. “When services falter, it often signals broader consumer caution and a slowdown in household spending,” noted one Frankfurt-based strategist. Retail sales have also slowed, suggesting that households are tightening belts amid higher energy prices and mortgage costs, further dampening the outlook for domestic demand.
Heightening the euro’s woes is a growing policy chasm between the ECB and the US Federal Reserve. Minutes from the ECB’s April meeting confirmed that policymakers remain committed to additional rate cuts, with Governor Christine Lagarde emphasizing that inflationary pressures in the region have receded to levels consistent with the bank’s 2 percent target. Since last summer, the ECB has already trimmed its main deposit rate seven times, lowering the cost of borrowing but also pushing yields on euro-area debt to multi-year lows.
In contrast, the Fed has maintained its key policy rate, opting for a “wait and see” approach amid signs of stickier inflation in the US and solid labor market data. Consequently, the gap between 10-year US Treasury yields and German Bund yields has widened to its highest in over a year, amplifying capital flows into dollar assets. Higher US yields make dollar-denominated investments more attractive, prompting cross-border portfolio reallocations that have further pressured the euro.
US Dollar Strength and Safe-Haven Flows
Beyond interest-rate differentials, the dollar’s relative resilience also stems from safe-haven demand amid heightened global uncertainty. Recent flare-ups in geopolitical tensions—ranging from renewed sanctions on major commodity exporters to flash points in Eastern Europe—have driven investors into traditionally defensive currencies. While the Swiss franc and Japanese yen have participated in this shift, the dollar remains the primary beneficiary, underpinned by its status as the world’s reserve currency.
This dynamic was evident on Thursday when the euro briefly dipped as low as $1.1293 before settling near $1.1320. Market participants noted that even modest upticks in risk aversion triggered outsized moves against the euro, underscoring its vulnerability in an environment of heightened caution.
Fiscal policy stances on either side of the Atlantic have also played a role. While the United States debates an expansive tax and spending package that could add trillions to federal borrowing, recent bond auctions have shown tepid demand, keeping US yields elevated. In Europe, many governments face tighter budget constraints under bloc-wide debt rules and are unlikely to embark on large-scale stimulus measures. With limited scope for fiscal expansion in the eurozone, reliance on monetary easing has deepened, further depressing euro-area yields relative to US counterparts.
Some analysts warn that without credible fiscal support from major member states—particularly in Southern Europe—growth in the euro area risks stagnating. Italy, for instance, has yet to finalize its 2025 budget, and political wrangling over public spending ceilings has weighed on confidence. Meanwhile, France and Spain have signaled only modest increases to infrastructure and green investments, leaving a gap that monetary policy alone may struggle to fill.
Energy Costs and External Pressures
Energy market developments continue to exert a double-edged influence on the euro. On one hand, wholesale gas and electricity prices have moderated from last winter’s peaks, easing cost pressures for households and businesses. On the other, persistent concerns over supply disruptions—stemming from tensions with key gas suppliers—keep a premium embedded in energy contracts, fueling headline inflation and leaving the ECB wary of premature policy loosening.
Moreover, the eurozone’s heavy reliance on energy imports means that any uptick in the euro can provide only limited relief. With the currency under pressure, firms face higher import bills for raw materials and intermediate goods, crimping profit margins and potentially feeding through into consumer prices, complicating the ECB’s disinflationary mandate.
From a technical standpoint, the euro has breached several support levels that had anchored it in recent months. The break below $1.1350 triggered stop-loss orders among leveraged speculators, which exacerbated the move. Open interest data suggest that many short-term traders had maintained bullish euro positions, expecting a spring rebound, only to be caught off guard by the dovish ECB messaging and robust US data.
Short-dated options markets also price in greater downside skew, indicating that investors are willing to pay a premium to hedge against further euro depreciations. On the flip side, implied volatility on euro-dollar options has climbed, reflecting markets bracing for pronounced swings around upcoming ECB and Fed policy decisions.
The path forward for the euro will hinge on the interplay between fresh economic releases, central bank guidance, and external shocks. Key eurozone indicators due in the coming weeks—including retail sales, industrial production, and a final reading of composite PMI—will provide clues on the depth of the downturn. Should data deteriorate further, the ECB is likely to reaffirm its easing bias, which could push the euro toward its 2024 lows near $1.10.
On the US side, forthcoming Fed minutes and employment reports will dictate the dollar’s trajectory. A resilient US labor market and sticky inflation would reinforce the dollar’s strength, whereas signs of cooling in the job market could prompt markets to price in earlier Fed rate cuts, potentially narrowing the yield gap.
Geopolitical developments—such as fresh sanctions, trade negotiations, or regional conflicts—remain wildcard factors capable of triggering abrupt shifts in currency valuations. For now, consensus among major banks is that the euro will trade in a range of $1.10 to $1.15 over the next quarter, with risks skewed to the downside given the prevailing policy divergence and growth concerns.
Against this backdrop, asset managers are recalibrating currency exposures. Some have trimmed euro allocations in global bond portfolios, while others are using currency forwards to hedge against further depreciation. In currency-hedged equity funds, managers have reduced euro-area stock weightings to mitigate translation losses. Meanwhile, exporters in the eurozone are increasingly turning to natural hedges—such as localizing production—to shield margins from currency swings.
Hedge funds have ramped up short positions against the euro, anticipating a continuation of the slide, whereas a subset of contrarians argue that excessive bearish positioning may set the stage for a technical rebound once the ECB signals a pause in rate cuts. Market watchers caution that any deviation from the expected policy path on either side of the Atlantic could spur a sharp counter-trend move.
The euro’s recent weakness reflects a complex mix of economic underperformance in the eurozone, aggressive monetary easing by the ECB, a comparatively firm US dollar backed by higher yields, and ongoing geopolitical and fiscal uncertainties. As investors digest upcoming data releases and central bank communications, the currency is likely to experience heightened volatility. For now, the euro appears poised to tread lower, unless signs emerge of a synchronized revival in European growth or an unexpected shift in the relative policy stances of the ECB and the Fed.
(Source:www.usnews.com)
Weak Business Activity Fuels Growth Concerns
A preliminary composite Purchasing Managers’ Index (PMI) for May revealed that activity across the eurozone unexpectedly contracted for the first time in several months. Both the services and manufacturing sectors fell below the 50-point threshold that separates expansion from contraction, with weakness most pronounced in business services and export-driven industries. Companies cited subdued demand, elevated input costs, and a drag from recent rounds of US import tariffs that have reverberated through supply chains.
With services accounting for roughly two-thirds of eurozone economic output, the slump in this segment has particularly alarmed economists. “When services falter, it often signals broader consumer caution and a slowdown in household spending,” noted one Frankfurt-based strategist. Retail sales have also slowed, suggesting that households are tightening belts amid higher energy prices and mortgage costs, further dampening the outlook for domestic demand.
Heightening the euro’s woes is a growing policy chasm between the ECB and the US Federal Reserve. Minutes from the ECB’s April meeting confirmed that policymakers remain committed to additional rate cuts, with Governor Christine Lagarde emphasizing that inflationary pressures in the region have receded to levels consistent with the bank’s 2 percent target. Since last summer, the ECB has already trimmed its main deposit rate seven times, lowering the cost of borrowing but also pushing yields on euro-area debt to multi-year lows.
In contrast, the Fed has maintained its key policy rate, opting for a “wait and see” approach amid signs of stickier inflation in the US and solid labor market data. Consequently, the gap between 10-year US Treasury yields and German Bund yields has widened to its highest in over a year, amplifying capital flows into dollar assets. Higher US yields make dollar-denominated investments more attractive, prompting cross-border portfolio reallocations that have further pressured the euro.
US Dollar Strength and Safe-Haven Flows
Beyond interest-rate differentials, the dollar’s relative resilience also stems from safe-haven demand amid heightened global uncertainty. Recent flare-ups in geopolitical tensions—ranging from renewed sanctions on major commodity exporters to flash points in Eastern Europe—have driven investors into traditionally defensive currencies. While the Swiss franc and Japanese yen have participated in this shift, the dollar remains the primary beneficiary, underpinned by its status as the world’s reserve currency.
This dynamic was evident on Thursday when the euro briefly dipped as low as $1.1293 before settling near $1.1320. Market participants noted that even modest upticks in risk aversion triggered outsized moves against the euro, underscoring its vulnerability in an environment of heightened caution.
Fiscal policy stances on either side of the Atlantic have also played a role. While the United States debates an expansive tax and spending package that could add trillions to federal borrowing, recent bond auctions have shown tepid demand, keeping US yields elevated. In Europe, many governments face tighter budget constraints under bloc-wide debt rules and are unlikely to embark on large-scale stimulus measures. With limited scope for fiscal expansion in the eurozone, reliance on monetary easing has deepened, further depressing euro-area yields relative to US counterparts.
Some analysts warn that without credible fiscal support from major member states—particularly in Southern Europe—growth in the euro area risks stagnating. Italy, for instance, has yet to finalize its 2025 budget, and political wrangling over public spending ceilings has weighed on confidence. Meanwhile, France and Spain have signaled only modest increases to infrastructure and green investments, leaving a gap that monetary policy alone may struggle to fill.
Energy Costs and External Pressures
Energy market developments continue to exert a double-edged influence on the euro. On one hand, wholesale gas and electricity prices have moderated from last winter’s peaks, easing cost pressures for households and businesses. On the other, persistent concerns over supply disruptions—stemming from tensions with key gas suppliers—keep a premium embedded in energy contracts, fueling headline inflation and leaving the ECB wary of premature policy loosening.
Moreover, the eurozone’s heavy reliance on energy imports means that any uptick in the euro can provide only limited relief. With the currency under pressure, firms face higher import bills for raw materials and intermediate goods, crimping profit margins and potentially feeding through into consumer prices, complicating the ECB’s disinflationary mandate.
From a technical standpoint, the euro has breached several support levels that had anchored it in recent months. The break below $1.1350 triggered stop-loss orders among leveraged speculators, which exacerbated the move. Open interest data suggest that many short-term traders had maintained bullish euro positions, expecting a spring rebound, only to be caught off guard by the dovish ECB messaging and robust US data.
Short-dated options markets also price in greater downside skew, indicating that investors are willing to pay a premium to hedge against further euro depreciations. On the flip side, implied volatility on euro-dollar options has climbed, reflecting markets bracing for pronounced swings around upcoming ECB and Fed policy decisions.
The path forward for the euro will hinge on the interplay between fresh economic releases, central bank guidance, and external shocks. Key eurozone indicators due in the coming weeks—including retail sales, industrial production, and a final reading of composite PMI—will provide clues on the depth of the downturn. Should data deteriorate further, the ECB is likely to reaffirm its easing bias, which could push the euro toward its 2024 lows near $1.10.
On the US side, forthcoming Fed minutes and employment reports will dictate the dollar’s trajectory. A resilient US labor market and sticky inflation would reinforce the dollar’s strength, whereas signs of cooling in the job market could prompt markets to price in earlier Fed rate cuts, potentially narrowing the yield gap.
Geopolitical developments—such as fresh sanctions, trade negotiations, or regional conflicts—remain wildcard factors capable of triggering abrupt shifts in currency valuations. For now, consensus among major banks is that the euro will trade in a range of $1.10 to $1.15 over the next quarter, with risks skewed to the downside given the prevailing policy divergence and growth concerns.
Against this backdrop, asset managers are recalibrating currency exposures. Some have trimmed euro allocations in global bond portfolios, while others are using currency forwards to hedge against further depreciation. In currency-hedged equity funds, managers have reduced euro-area stock weightings to mitigate translation losses. Meanwhile, exporters in the eurozone are increasingly turning to natural hedges—such as localizing production—to shield margins from currency swings.
Hedge funds have ramped up short positions against the euro, anticipating a continuation of the slide, whereas a subset of contrarians argue that excessive bearish positioning may set the stage for a technical rebound once the ECB signals a pause in rate cuts. Market watchers caution that any deviation from the expected policy path on either side of the Atlantic could spur a sharp counter-trend move.
The euro’s recent weakness reflects a complex mix of economic underperformance in the eurozone, aggressive monetary easing by the ECB, a comparatively firm US dollar backed by higher yields, and ongoing geopolitical and fiscal uncertainties. As investors digest upcoming data releases and central bank communications, the currency is likely to experience heightened volatility. For now, the euro appears poised to tread lower, unless signs emerge of a synchronized revival in European growth or an unexpected shift in the relative policy stances of the ECB and the Fed.
(Source:www.usnews.com)
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