Where we are: EUR/USD trades at 1.1697, down 0.15% on the day and near the bottom of its 1.1694-1.1721 intraday range. The Fiber continues to struggle below the 1.1700 handle, failing to capitalize on earlier European session attempts to rally. This comes after yesterday’s close near 1.1715, signaling a continuation of the recent bearish trend.
What’s driving it: Euro weakness is being driven by a combination of factors, but the immediate pressure stems from rising German yields, particularly the Schatz (2Y) which is up 4bp to 2.690%. This yield move is happening in tandem with concerning regional CPI numbers, with Spanish inflation unexpectedly quickening beyond the ECB’s goal. Even with the most recent ECB cut of 25bp, markets are concerned further easing is less likely if inflation continues to accelerate. The mildly easing bias remains in place, but policymakers are clearly divided. DXY strength, currently at 98.61, is adding additional downside pressure on the Fiber.
- The Spanish inflation print is at 3.5%, the highest since June 2024, creating doubt about ECB easing.
- DE 2Y (Schatz) yields climbed to 2.690%, a 4bp increase on the day.
- Speculator positioning in the Euro is modestly long at +41,324 contracts, sitting at the 10th percentile; this leaves significant room for further short positioning.
NY session focus: Focus in the NY session shifts squarely to the FOMC decision at 14:00 ET and the subsequent press conference at 14:30 ET. Markets widely expect rates to remain unchanged at 3.75%, but any hawkish rhetoric could send the DXY higher and EUR/USD lower, potentially testing the 1.1650 level. Keep an eye on the US 2Y yield, currently at 3.879%, which is highly sensitive to Fed policy expectations. A break below 1.1690 could trigger a deeper sell-off towards 1.1600. The pain trade for EUR/USD would be a dovish surprise from the Fed, prompting a sharp rally back towards 1.1750.