Euro Drops Against Dollar
Euro Slips Toward Two-Month Lows as Fed Tightening and Energy Risks Weigh
Anonymous
Key Points
1
Scotiabank said EU concern about a possible U.S. diesel-export ban was weighing on the euro despite U.S. denials; it also identified support around 1.1325–1.1350.
2
Germany’s September Ifo Business Climate Index rose to 89.9 and its Expectations component to 90.4. Scotiabank noted that improving sentiment was aligning somewhat better with firmer German growth after an unusual divergence from GDP since 2024.
3
ING said the euro’s break below 1.140 had pushed it into stretched undervaluation against its short-term fair-value model, partly because short-term rate differentials had moved in the euro’s favor. It also noted eurozone PMIs surprised to the upside, particularly services.
4
Options-market positioning turned increasingly bearish, with year-end bets on the euro near levels last seen in mid-August, according to Bloomberg.
The euro has fallen 2.4% against the dollar over the past month, sliding to near two-month lows around 1.1372 as hawkish Federal Reserve signals and rising Treasury yields boost safe-haven demand for the dollar FXStreet. U.S. economic resilience, combined with fears of a potential American diesel export ban that could squeeze European energy supplies, has pressured the currency while the ECB remains on hold at 2.65% versus the Fed's 4.00% rate premium FXStreet.
Europe's exposure to costly energy, political uncertainty, and weak growth prospects have limited the euro's appeal despite some positive signals from German business sentiment FXStreet. Analysts see support around 1.1325–1.1350 with potential downside toward 1.13, though a shift in Fed rate expectations could spark a recovery toward 1.1430–1.16 FXStreet.
Fed Rate Expectations Push Dollar Higher
The Federal Reserve's hawkish stance has widened the U.S.-German two-year yield spread, pulling capital into dollar assets. Markets now price a 55% probability of another 25 basis-point Fed rate hike at the October 28 meeting, according to market data FXStreet. This rate differential—the Fed at 4.00% versus the ECB at 2.65%—creates a powerful incentive for investors to hold dollars and abandon euros.
The dollar index remains firmly supported by expectations of prolonged U.S. interest-rate strength. Meanwhile, Middle East conflict and shipping constraints in the Strait of Hormuz have boosted safe-haven demand for the greenback, adding to downward pressure on the euro FXStreet.
Trump's Diesel Export Ban Threat Spooks Markets
President Donald Trump has publicly advocated for pausing U.S. diesel exports, stating: "I've said let's not send out the diesel. We make a lot of diesel... American fuel should stay home with Americans." Treasury Secretary Scott Bessent noted the administration is assessing whether a full or partial export ban is feasible FXStreet. The concern weighs heavily on the euro because the EU relies on U.S. Gulf Coast refiners for nearly 19% of its petroleum products.
European Commission officials voiced concern on September 24, warning that a U.S. energy export ban would create "negative bilateral economic risks." FXStreet Scotiabank strategists noted that persistent EU worry about the diesel ban is driving euro weakness despite official U.S. denials. Diesel prices have already spiked to $6.50 per gallon in the U.S., while European gasoil-to-Brent spreads hit record highs above $100 per barrel, disproportionately hurting European assets.
German Data Offers Limited Support
Germany's September Ifo Business Climate Index rose to 89.9, with its Expectations component climbing to 90.4 TradingPedia. Scotiabank noted that the improving sentiment aligns better with firmer German growth after a puzzling divergence from GDP throughout 2024. Eurozone PMI data also surprised to the upside, particularly in the services sector, offering modest support for the currency.
The euro gained ground against the British pound near three-month highs, with EUR/GBP trading near 0.8600 TradingPedia. However, these pockets of strength in European data have not been enough to offset the Fed's rate-hike expectations and energy concerns, limiting the euro's overall recovery against the stronger dollar.
Technical Levels and Options-Market Bearishness
EUR/USD's drop below 1.1400 has pushed the pair into stretched undervaluation relative to ING's short-term fair-value model around 1.1500 FXStreet. ING noted that rate differentials had recently moved in the euro's favor, yet momentum remained downward. Major support sits at 1.1325–1.1350, with potential downside tests toward the 1.13 zone if weakness persists FXStreet.
Options-market positioning has turned sharply bearish, with year-end bets on the euro returning to elevated risk levels not seen since mid-August FXStreet. A recovery toward 1.1430–1.16 is possible only if Fed rate expectations cool or geopolitical pressures ease. For now, the combination of higher U.S. rates, energy anxiety, and safe-haven demand keeps downside risks firmly in focus.
Sentiment
Mostly NegativeNEGATIVENEUTRALPOSITIVE
Publishers
30
Articles
19
Reach
49
A
AnonymousAuthor
