The euro-dollar pair is plunging, hitting ever-lower lows. The nearest significant support is at 1.1330 (the lower Bollinger Band on the W1 timeframe), and given the strength of the downward impulse, sellers could well test this technical barrier soon.
Published European PMIs and the German IFO, which we will discuss in detail below, did not help EUR/USD buyers. And this despite nearly all components of the reports being in the green zone, reflecting a revival of recovery processes in the eurozone economy. Traders ignored these macro signals, as well as hawkish verbal signals from European Central Bank officials. Market participants seem "tunnel-visioned" on Federal Reserve tightening, even though similar processes are occurring on the other side of the Atlantic.
Moreover, traders are effectively ignoring the fact that a stronger greenback carries certain risks — not only the obvious factor of potentially positive outcomes from talks between Donald Trump and Xi Jinping and the consequent rise in global risk appetite. Other, less obvious threats also face the current dollar rally. For example, few recall the recent episode with US Treasuries, when the US Treasury increased the volume of operations to buy back long bonds, effectively supporting that market segment and helping to push yields lower.
Treasuries are back in the market discussion. Yesterday US bond yields rose sharply: 10-year yields climbed to 5.148% (the highest since 2007), and 30-year yields to 5.44% (the highest in 22 years). The catalyst for the rise was not only strong US PMIs but also a repricing of the Fed's rate trajectory. The US business activity index hit a five-year high, rising to 58.4 amid accelerating employment subindices and increased price pressures. At the same time, Fed officials effectively signaled another round of monetary tightening: Governor Michael Barr said further rate increases are "likely to be required," and New York Fed President Williams called such a step "a perfectly reasonable scenario."
In fact, what matters now is less the reasons for rising yields than the US Treasury's possible reaction. Will Scott Bessent's department respond this time?
Recall that in August the Treasury doubled the size of its liquidity-support operations for long Treasuries — to $4 billion per operation in the 10–20 and 20–30 year sectors. The reasons for that decision are obvious: excessively high long-term rates raise the cost of servicing the national debt, tighten financial conditions, and transmit through the mortgage market to the whole economy.
A buyback can reduce the supply of securities on the market and support their liquidity, but it does not solve the fundamental problems underlying rising yields — high inflation, large borrowing volumes and the Fed's tougher rhetoric. Therefore, Treasury support may be only temporary. But the very fact of another official reaction to rising yields would put strong pressure on the greenback, since it would signal a kind of "manual regulation" of the debt market.
It is worth repeating that the EUR/USD decline is driven exclusively by dollar strength, not euro weakness. In major cross pairs, the euro looks quite resilient (EUR/GBP, EUR/JPY, EUR/CHF). And not without reason: the euro now has several fundamental arguments in its favor.
For example, the eurozone PMI turned out unexpectedly strong. The composite index rose in September to 53.1 (from 52.0 in August), reaching a high since April 2023. The services index jumped to 53.0 (after rising to 51.6 in August), contrary to forecasts of a drop to 51.4. The manufacturing PMI also remained in expansion at 52.7.
German data also pleased euro buyers. Germany's composite PMI surged to 53.8 (from 51.8), and the services sector returned to growth for the first time in five months, rising from 49.7 to 52.9. At the same time, companies reported higher costs (due to expensive energy) and rising employment. In other words, the economy looks resilient and inflationary risks remain high. That combination supports stronger hawkish expectations, especially since ECB officials have recently hardened their rhetoric.
For example, Bundesbank head Joachim Nagel said that high oil prices "are becoming an increasingly important factor for ECB decisions." In this context, he did not rule out further rate increases, noting that current rates are "neither stimulative nor restrictive yet."
Another ECB figure, Martins Kazaks, said that September's rate hike is unlikely to be the last. Vice President Boris Vujcic also took a hawkish stance. According to him, the energy shock is already stronger than initial forecasts, and energy prices are now a "key factor for the path of rates."
In other words, the fundamental picture for the euro is quite favorable. A kind of "icing on the cake" in this respect was today's IFO report. Germany's business climate index rose to 89.9 (from 88.8), beating the forecast (89.0) and reaching a high since May 2023. The current-conditions assessment improved to 89.5 (from 88.5 in August) and the expectations index to 90.4 (from 89.1). Thus, the improvement covers both the current situation and near-term prospects for the German economy.
Therefore, the EUR/USD downward impulse looks vivid and large, but also unreliable and unstable. The market has almost fully priced in a hawkish turn by the Fed (allowing a 50% probability of a December hike after an October increase), while ignoring strong European data, a rising inflation component, and the ECB's readiness to continue tightening. If Treasury yields begin to fall again and market expectations about further Fed action prove overstated, one of the key supports for the greenback could quickly weaken. The euro would move back to the fore.
All this suggests that the dollar's current strength, impressive as it is, cannot yet be considered "unquestionably sustainable." Moreover, in my view, the market underestimates the euro's potential against the greenback — especially if the risks to the US currency enumerated above begin to materialize.
As noted above, EUR/USD is now approaching 1.1330 — the lower Bollinger Band on the weekly chart. This is a fairly strong support level, so caution is warranted in this price area. For a confident further move toward the low-$1.30s (and below), the market will need an additional informational driver. If no new arguments in favor of the dollar appear, buyers could regain initiative in the pair and organize a corrective retracement back into the $1.14 area.
*A análise de mercado aqui postada destina-se a aumentar o seu conhecimento, mas não dar instruções para fazer uma negociação.
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