Where we are: EUR/USD is trading at 1.1334, down 0.47% on the day, having dipped to a fresh one-year low overnight. The pair is trading below yesterday’s New York close and is testing key support around the 1.1300 psychological level. The intraday range has been capped by the overnight weakness, with upside resistance firming around 1.1375.
What’s driving it: The Euro’s weakness stems primarily from a reassessment of the ECB’s tightening path. While the ECB hiked 25bp in early June, recent commentary from President Lagarde suggests a less aggressive stance is warranted, even with HICP at 3.2%. This has pared back market pricing for a September hike, with only 50% odds now priced in. The FT reported this morning that falling oil prices are easing pressure on the ECB, reinforcing this dovish shift. While the US dollar index (DXY) is up 0.32% on the day, this is a secondary driver to the recalibration of Eurozone monetary policy expectations.
- ECB President Lagarde’s comments yesterday signalling no need for aggressive policy response to Middle East conflict, despite elevated inflation.
- FT Markets headline this morning: “Euro sinks to one-year low as falling oil prices ease pressure on ECB”.
- Speculative net non-commercial positioning remains modestly long at +34,353 contracts, but the recent price action suggests these longs are being tested and potentially unwound.
NY session focus: The primary focus will be on US macro data due at 08:30 ET, particularly any prints that could influence the Fed’s path. Given the ECB’s softening bias, any hawkish surprises from the US data could see EUR/USD extend its decline towards the 1.1250 level. Conversely, a softer US print might offer some temporary respite, but the underlying narrative of a less hawkish ECB is likely to cap upside. The trade that’s working is short EUR/USD, and the pain trade is a sharp reversal higher on unexpected US weakness, forcing a rethink of the ECB’s current trajectory.