06.10.202600:40 Forex Analysis & Reviews: EUR/USD: Fear of a Major Energy Crisis Hits the Euro Harder

September PMI data confirmed that the eurozone economy coped with the first blow of the energy shock better than feared. The composite index rose to 52.1, and manufacturing readings were solid.

Headline inflation in the eurozone rose from 3.3% to 3.8% year-on-year in September, well above forecasts; energy prices were the main driver, with that sector up 18.8%. Core inflation increased only 0.1 percentage point to 2.5%, in line with expectations. So far there is no evidence that high energy prices have broadly spread into other categories.

European Central Bank officials spoke often last week but did not add clarity — the overall tone, with caveats, remains hawkish. Lagarde touched on fiscal discipline; Isabel Schnabel expressed views some analysts interpret as indicating no rate hike in October. The ECB appears to prefer to stay calm amid uncertainty and to continue tightening at a quarterly pace.

The market sees rate increases for December and March, so October's meeting will likely be skipped. In addition, the ECB's wage tracker was slightly revised down for upcoming quarters, which raises the likelihood that second-round effects from high energy inflation on wages will be smaller than in 2022–2023. The market is pricing three additional ECB hikes by September 2027.

At the same time, the Fed is expected to continue tightening. US core PCE is 3.0% — still too high — and unemployment at 4.1% is close to full employment. The FOMC remains united, and the lack of a clear conflict between inflation and employment goals gives it room to tighten further. The interest-rate differential therefore continues to work in the dollar's favor. If the market scales back its ECB expectations while the Federal Reserve delivers as promised, the differential will shift further toward USD.

The energy shock remains the main structural headwind for the euro, and its asymmetry is obvious. The US is a net energy exporter while the eurozone is a net importer. Europe buys LNG at global prices, whereas gas in the US trades at a fraction of the European benchmark. This undermines Europe's competitiveness in chemicals, metals and fertilizer production and feeds through to electricity, food and transport costs.

Gas prices remain elevated, and European storage is below seasonal norms; the longer energy prices stay high, the harder it will be to keep the economy resilient.

Net short positioning in the euro, per the CFTC report, rose over the week to -$9.1 billion — speculative positioning is decisively bearish, and there are no reasons to expect the calculated fair value to turn up.

A week ago we saw potential for EUR/USD to fall to support at 1.1325; the pair broke that level and stopped only at a one-and-a-half-year low of 1.1162. We don't see this as the end: despite clear oversold conditions, the euro has no room to strengthen amid a growing risk of a major energy crisis and an expanding yield spread. The next support levels are 1.1128 and 1.1066; a break below them would reinforce the bearish trend.