EUR/USD is currently positioned at $1.1633 during the European session on Monday, with cross-venue quotes stabilizing around $1.16556 and intraday sentiment reflecting a 55.80% inclination towards buying. The recent print marks a significant point in a prolonged decline that has seen the single currency fall from the $1.18 region in early May, moving toward the lower end of its current trading range. The 1-day change shows a minimal increase of +0.22 cents, which is, in isolation, quite unremarkable. The narrative behind that fractional movement is far from simple. The pair currently rests on the threshold that distinguishes a tradable consolidation from a structural breakdown. The forthcoming 96 hours of price action, influenced by Wednesday’s FOMC minutes, U.S. PMI data on Thursday, and ongoing developments regarding Iran, will determine the market’s direction relative to that threshold. The current setup is notable as the euro has diminished its downside momentum, even in a context that, by conventional standards, should be significantly detrimental to its performance. The U.S. 10-year Treasury yield stands at 4.60%, marking a peak not seen in a year. Brent crude remains positioned above $110 a barrel, presenting a significant challenge for European inflation due to the bloc’s reliance on energy imports. The Strait of Hormuz continues to be obstructed. The prevailing risk sentiment in global cross-asset markets is decidedly cautious. Despite expectations, EUR/USD has not managed to decisively fall below $1.16, avoiding a move towards the bearish target range of $1.144 to $1.138 that has been widely agreed upon by various analysts. The refusal serves as a piece of information, and Kit Juckes at Societe Generale has highlighted precisely what is occurring beneath the surface.
Juckes’s assessment is the most straightforward interpretation available at the moment. The EUR/USD pair has declined from $1.18 to $1.16; however, this movement has come to a halt despite the SG Sentiment Indicator experiencing a downturn and the rates markets adjusting for a series of unexpected hawkish developments. According to Juckes, the rationale consists of two components. Initially, there exists a firmly established bearish sentiment towards the dollar within the speculative community. President Trump seeks a depreciated dollar and reduced interest rates, while taking no action to reassure foreign investors in maintaining long-dollar positions. The prevailing structural sentiment overhang is serving as a counterbalance to each dollar-positive macro catalyst that ought to be driving the pair downward. The front end of the U.S. rates curve is currently reflecting a significant probability of a Fed hike occurring before the end of the year. This represents a favorable adjustment in expectations for the dollar. However, the European rates curve continues to reflect expectations of three ECB rate increases, while the U.K. curve incorporates two and a half hikes from the Bank of England. Juckes emphasizes that as long as the expectations for European rate hikes remain unchallenged, the differential in relative rates will not be sufficient to drive EUR/USD significantly lower. The euro’s strength is supported by a framework of rate expectations that could be overly optimistic regarding ECB tightening — however, as long as the market does not challenge that framework, the support remains intact.
The futures market is currently “busy giving up on long USD positions,” as noted by Juckes. This speculative repositioning represents a contrarian setup that has historically limited the extent of the dollar’s short-term rally. When an excess of speculative traders are short on the dollar, each increase in DXY prompts a cascade of stop-losses that revert to bearish positions at the initial indication of weakness. That is the mechanism underneath the current 1.16 floor on EUR/USD. The macro environment that, all else being equal, should have EUR/USD trading significantly below $1.16 is quite challenging. The U.S. 10-year Treasury yield reached 4.631% intraday on Monday, marking the highest level since February 2025, following an increase of over 20 basis points last week. The 2-year stands at 4.102%, marking a peak not seen in 14 months. The 30-year stands at 5.159%, marking the peak level in a year. Japanese 10-year JGBs have surged to 2.793%, marking the highest level since 1997 (or 1999, depending on the dataset you reference), while the 30-year JGB reached an unprecedented high of 4.1%. The ongoing global bond rout is impacting the EUR/USD trade in two distinct ways at the same time. Initially, it is adjusting inflation expectations on a global scale and compelling each G10 central bank to evaluate a more aggressive response strategy. Secondly, it is initiating capital repatriation flows that are marginally beneficial for the dollar. Japanese investors are divesting from Treasuries and other foreign securities to capitalize on the newly appealing domestic yields. This action inherently drives Treasury yields upward and diminishes the strength of the dollar’s main rival in the reserve currency arena. Incorporate the impact of oil-driven inflation on the eurozone — Europe relies heavily on imports for its natural gas and crude oil, exposing it to a fundamental energy vulnerability that the U.S. does not experience — thus, the macroeconomic imbalance appears to be unfavorable for the euro.
The reason it isn’t fully delivering that asymmetry on the screen is the rates pricing mismatch that has been highlighted by Juckes. The market continues to attribute value to the ECB’s tightening measures, despite the possibility that it may not fulfill expectations. The upcoming May PMI figures for the eurozone, set to be released on Thursday, will serve as a crucial assessment of whether the current hawkish expectations from the ECB hold up against the real European growth statistics. Should the May PMIs fall short of expectations and validate a deceleration throughout the currency area, the rates market will have to adjust by removing ECB rate hikes from the curve. This adjustment could be the catalyst that enables EUR/USD to decisively surpass the $1.16 level. April U.S. CPI recorded a year-over-year increase of 3.8%, marking the highest inflation figure in almost three years. The Producer Price Index surged 6% year-over-year, marking the quickest rate in approximately four years. The recent prints have undermined the rate-cut narrative that the bond market had been pricing in throughout the spring. The CME FedWatch tool indicates that approximately 97.4% of market participants anticipate the Federal Reserve will maintain rates at 3.50% to 3.75% during the June meeting. The likelihood of a reduction to 3.25% to 3.50% in June stands at a mere 2.6%. Significantly, market pricing has started to incorporate the likelihood of increases — rather than decreases — in late 2026 or early 2027.
Yardeni Research has clearly outlined the direction ahead. If the Fed, under the leadership of Kevin Warsh, fails to adopt a more hawkish approach, it risks relinquishing control over the inflation narrative completely. Mortgage rates and other consumer loan and credit costs are being influenced upward by Treasury yields — monetary tightening is taking place in the bond market, independent of the FOMC’s official actions. The central bank faces a pivotal decision: embrace the new reality and communicate that stance, or risk falling out of step with the evolving landscape. The release of Wednesday’s FOMC minutes will provide the initial detailed insight into the actual thought processes of policymakers. Four dissenters at the previous meeting have already indicated internal divisions. Should the minutes indicate that the hawkish faction is strengthening, we can expect Treasury yields to rise, the dollar to receive a boost, and EUR/USD to encounter increased selling pressure. If the minutes indicate a dovish stance and highlight that energy-driven inflation should be disregarded, the rate differential argument that has bolstered the dollar may weaken, potentially allowing the pair to surge aggressively toward $1.18. The primary factor influencing EUR/USD in the upcoming six weeks will be the resilience of market expectations regarding ECB rate hikes in light of the next set of European data releases. The futures curve currently reflects an expectation of three rounds of ECB tightening throughout 2026. That is a bold trajectory considering the economic outlook. The eurozone economy exhibits inherent weaknesses compared to the U.S., relying significantly on energy imports and burdened by self-imposed regulatory limitations on domestic energy production. The bloc is contending with imported inflation stemming from the energy spike driven by Iran, which occurs without the accompanying domestic growth support that the U.S. is currently enjoying.
LiteFinance’s Demidenko has clearly articulated the situation: the decline in eurozone PMIs reflected in the May data will validate the notion that the market is overestimating ECB tightening. Once this understanding permeates the rates curve, EUR/USD is poised for a significant downturn, targeting $1.156 and moving toward the $1.144 and $1.138 levels. The bearish thesis is predicated on the ECB opting for caution rather than pursuing aggressive normalization, a stance that has historically characterized the Frankfurt central bank when confronted with growth challenges. The opposing view is notably presented by Morgan Stanley, which anticipates EUR/USD reaching $1.23 by Q3 — a level not observed since early 2021. The argument presented by Morgan Stanley centers around the decreasing hedging expenses faced by European investors who possess U.S. securities. Should the ECB implement a notably aggressive tightening cycle compared to the Fed, the costs associated with currency hedging for European institutional investors holding U.S. assets would significantly decrease. This scenario could potentially lead to an influx of approximately $214 billion in hedging flows directed into the EUR/USD pair. This represents a significant structural commitment towards the euro. These two cases are not inherently at odds with each other. The developments are interconnected and depend on the scenario that unfolds at the ECB. If the ECB confirms the market’s hawkish expectations, Morgan Stanley’s target of $1.23 is within reach. If the ECB reassesses its tightening path due to weak PMIs, LiteFinance’s $1.138 target emerges as the primary downside scenario. The data released on Thursday will begin to provide insights into that inquiry.