EUR/USD is currently at 1.1684, reflecting a modest increase of 0.05% from Wednesday’s closing figure of 1.1677. During the European session, the pair reached a new three-month peak at 1.1711. The session low is recorded at 1.1670, while the opening figure was 1.1677. The pair has increased by 2.50% over the trailing month and by 0.62% over the past twelve months. The euro spent Monday and Tuesday constrained around the 1.1580 level, which had defined the peak in August. It has taken approximately $0.013 out of the dollar over two sessions and has surpassed a level that had previously rejected it on four distinct occasions during the first half of the month. The dollar index has reached a new eleven-week low, approaching 98.70. That is the actual event. On August 14, the index was positioned at 99.515, with its 200-day average situated just below this level. It has experienced a decline of over eighty basis points in just four sessions, breaching the technical floor that had been sustaining the entire complex. The catalyst was not European. Long-dated Treasury yields experienced a significant decline on Wednesday as the Treasury deviated from its established schedule to increase the volume of longer-dated debt repurchases. The yield on the 30-year note dropped from a nineteen-year peak of 5.337% to 5.211%. The curve flattened, the dollar experienced a sell-off, and EUR/USD saw a significant spike. Thursday has seen a partial reversal in the yield movement, with the 30-year bond returning to 5.236% and the 10-year bond at 4.696%. Meanwhile, the euro has maintained its gains.
At the core of the dollar narrative lies a significant shift in policy. Market pricing indicates an approximate 84% likelihood of a 25 basis point increase by the European Central Bank on September 10, which would elevate the deposit rate from 2.25% to 2.50%. The Federal Reserve has a 69.9% probability of maintaining its rate within the range of 3.50% to 3.75% during the same month. For the first time in this cycle, the rate gap is compressing due to tightening on the European side, rather than easing on the American side. That represents a fundamentally distinct catalyst compared to the one that fuelled the 2025 euro rally, and it accounts for the current consideration of 1.1800. The constraint is momentum. RSI stands at 73.98, indicating a clear overbought condition, while the price is positioned 137 pips above the 20-period EMA at 1.1547. Analysing the euro in conjunction with the dollar index reveals a rationale that is not immediately apparent when examining the EUR/USD chart in isolation. The index was positioned at 99.515 on August 14, with the 200-day moving average situated just beneath, and the entire framework reliant on that examination. July retail sales recorded a decline of 0.6%, marking the most significant monthly decrease since May 2025. In July, nonfarm payrolls reported a decline of 23,000, contrasting sharply with forecasts that anticipated an increase of approximately 83,000. Additionally, revisions for May and June reflected a downward adjustment totalling 103,000. The preliminary August University of Michigan sentiment reading experienced a decline.
Four consecutive tier-one US data disappointments led the index to its 200-day moving average and subsequently breached it. By Thursday it had reached 98.70, an eleven-week low, approximately 0.82% below the August 14 level. That represents the complete euro rally articulated in the appropriate currency. The mechanics of the Treasury announcement compound it directly. The department is set to double the scale of liquidity support buyback operations for longer-dated nominal coupon securities within the 10-year to 20-year and 20-year to 30-year sectors. The per-operation ceiling will increase from $2 billion to a minimum of $4 billion, effective from September 9 through November 4, according to the Treasury’s statement released on August 19. Buybacks are financed from the Treasury General Account. Utilising that balance to acquire outstanding paper injects dollar liquidity into the private sector. Declining long-term yields exert a negative influence on the dollar through the rate-differential component, while an increase in dollar supply adversely affects the dollar via the flow aspect. Both were dismissed at the same time. The signal was more pronounced than the mechanics themselves. A mid-quarter revision to a schedule published two weeks earlier disrupted the department’s established convention and signalled to the market that Washington is favouring lower long-term yields at the expense of currency strength.
The technical read on the dollar has reached a binary state. A decisive push back through 98.74 would confirm a short-term floor and drag EUR/USD toward the low 1.17s and potentially the 1.16 handle. A clean sustained break under 98.00 opens the path for the euro to attack 1.1800 to 1.1840. Both charts are based on the same test. This represents the structural change that distinguishes August 2026 from all previous euro rallies in this cycle. The ECB spent the initial months of the year implementing cuts as inflation seemed to be aligning with the 2% target. The US-Iran war ignited in late February, leading to a surge in energy costs across the continent. On June 11, the Governing Council raised all three policy rates by 25 basis points — marking the first increase since 2023 and the initial action taken by any major central bank to combat stagflationary pressures stemming from the conflict. The deposit rate has remained at 2.25% since then, with the July 23 meeting resulting in a hold that markets had anticipated with over 95% certainty. Pricing has since advanced significantly beyond a mere follow-up. The likelihood of a 25 basis point increase on September 10 is estimated to be between 70% and 84%, contingent on the metric used, resulting in a deposit rate of 2.50%. A survey of economists revealed that the majority anticipate precisely that outcome. Beyond September, markets fully anticipate the deposit rate reaching 2.75% by early 2027, suggesting two additional increases, with the first expected next month.
The data supporting that path arrived across two consecutive tier-one releases. In July, inflation within the Eurozone reached 2.9%. ECB staff projections indicate that average inflation for 2026 is expected to be 3.0%, primarily driven by energy costs, and the figures from July align with this forecast rather than contradicting it. Growth exceeded expectations during the same week. The subdued figure indicated a rise in non-energy industrial goods inflation from 0.7% to 0.9%. Goods inflation had consistently remained the most reliably subdued component throughout the entire energy shock. It turning higher signals input costs reaching the manufacturing chain rather than remaining confined to fuel and utility bills. The counterargument originated from within the Governing Council. Olli Rehn observed on Wednesday that wage growth continues to be subdued and that there are currently no evident indicators of second-round inflation effects. That represents the dovish perspective, which is significant — an increase in rates amid an energy shock without wage pass-through could lead to a tightening in the face of a demand slowdown. The Council has indicated a direction while refraining from any pre-commitment. Markets have made prior commitments for them.
