The euro attempted to establish a foundation during the European morning but succumbed within an hour following the release of US inflation data. The EUR/USD pair experienced a decline of 0.55%, reaching 1.1135, marking its lowest point since May 2025. The one-hour chart indicated a slight recovery to 1.1139 shortly thereafter, yet the pair remained constrained beneath its 100-period moving average at 1.1194 and the 200-period average at 1.1209. The session commenced on a positive note. The pair ascended beyond 1.1200 during the European morning session, advancing toward 1.1210 as the dollar weakened and Treasury yields softened in anticipation of forthcoming data. By the time New York entered the scene, the euro had declined to 1.1192, reflecting a modest decrease of 0.05% for the day. Subsequently, the inflation report was released at 8:30 a.m., resulting in a nearly 60-pip decline in the pair in a direct trajectory. The level is significant. Earlier this week, EUR/USD reached a 17-month low near 1.1150, with the intraday floor positioned at 1.1152. Wednesday’s slide breached that low and established a new one at 1.1135. A breach of the weekly low coinciding with a significant data release serves as a quintessential continuation signal, with the pair currently trading 15 pips beneath the support level established on Monday and Tuesday. The thesis for this forecast is clear and direct. The EUR/USD exchange rate is influenced by three converging factors: an expanding interest-rate differential following a robust US Consumer Price Index report, an energy crisis that adversely affects the eurozone’s terms of trade to a greater extent than that of the United States, and fiscal pressures in France that introduce an additional risk premium for euro-denominated assets. The ECB is increasing rates as well, albeit from a lower starting point and amidst a more fragile economic landscape. Until one of those three forces shifts, rallies in the euro represent corrections within a prevailing downtrend.
The trend has been in motion since January. At the conclusion of that month, the euro reached a 4½-year peak exceeding $1.20. From that level to 1.1135, the single currency has depreciated by over 7% against the dollar. The decline accelerated through the summer as the Fed moved toward hikes and oil climbed, and it extended in October as French borrowing costs jumped. There exists a counterpoint. Prior to the release, the dollar rally seemed excessive, EUR/USD appeared undervalued, and the bearish momentum was diminishing. Some of the elevated inflation was arguably anticipated in the pricing. That setup is the reason the pair rebounded toward 1.1210 earlier in the session. The CPI details were sufficiently robust to mitigate the oversold condition. The question now is whether 1.1135 signifies a final flush or the commencement of the next phase toward 1.1100 and 1.1000. The euro’s bounce during the European session relied on a singular premise: that US inflation would either fall short of or align with expectations, providing the overextended dollar with a rationale for a correction. The Bureau of Labour Statistics presented contrasting data. Consumer prices increased by 0.6% in September, aligning with the monthly forecast, while the annual rate accelerated to 3.7%, up from 3.4% in August, surpassing the consensus estimate of 3.6%. Core CPI, excluding food and energy, increased by 0.3% month-over-month, surpassing the 0.2% estimate, and ascended to 2.6% year-over-year from 2.4%, exceeding the 2.5% forecast. US inflation has consistently exceeded the Fed’s 2% target for a duration of 67 consecutive months.
Energy was the primary driver of the headline: petrol surged 9.1% in September, contributing to over half of the monthly increase, while the broader energy index experienced a rise of 5.2%. The primary unexpected development stemmed from shelter, which increased by 0.4%, alongside used vehicles, which rose by 0.7%. Additionally, there were increases in airfares, recreation, education, and medical services. Shelter alone contributed 0.15 percentage point to the core measure. In currency markets, it is the core number that has influenced price movements. A headline surprise driven by petrol can be regarded as a supply shock that the Fed is likely to overlook. A fundamental unexpected development necessitates a policy reaction. The rate market responded immediately. The likelihood of a 25-basis-point Federal Reserve increase in October surged to 47% from 22% the previous day, based on a specific measure of futures pricing. Alternative analyses of fed funds futures indicated a 78% likelihood of maintaining the current rate, whereas a particular prediction market adjusted the probability of an October rate hike to 55%, up from 21%. Across every measure, the trajectory remained consistent: an increase in Fed tightening was anticipated. That repricing impacted the euro via the most straightforward mechanism in foreign exchange: relative yields. The 10-year Treasury yield increased by over 6 basis points, reaching 5.278%. Increased yields in the United States enhance the appeal of dollar-denominated assets, resulting in a capital shift away from currencies with lower yields. The euro, characterised by a more substantial yield discount relative to the dollar and its vulnerability to energy fluctuations, bore the brunt of the impact.
Prior to the data release, the concern prevalent among European trading desks was that US CPI would show an uptick in both headline and core figures, potentially leading to increased yields and a stronger dollar, which could drive the euro below this week’s low of 1.1152. That is exactly what transpired. The scenario that certain euro bulls had considered a tail risk has now become the base case following a single release. The primary determinant of EUR/USD is the differential between the returns investors receive in dollars versus those in euros. That spread experienced a significant widening on Wednesday. The 10-year Treasury yield increased by over 6 basis points to 5.278% following the release of the CPI. Germany’s 10-year Bund yield, the eurozone’s benchmark, eased to 3.45% on the same day, marking its lowest level since September 9, as German bonds attracted safe-haven demand amid a global equity selloff. That positions the US-German 10-year spread at 182 basis points. The direction of travel holds equal significance to the level itself. In early October, Bunds were yielding approximately 3.5%, while the 10-year Treasury approached its October 7 peak of 5.364%, marking the highest level since 2002. Since then, Bund yields have experienced a decline due to safe-haven buying, whereas Treasury yields have rebounded toward that peak. The disparity has increased in favour of the dollar on both fronts. The 2-year sector conveys a comparable narrative. Germany’s 2-year yield was approximately 3.10% in early October, indicating anticipations for additional tightening by the ECB. US 2-year yields remain significantly elevated, with the Federal Reserve’s upper limit established at 4%, and market participants are increasingly anticipating a greater likelihood of an interest rate increase in October.
The short-end spread serves as the most accurate indicator of comparative policy expectations, and it shifted unfavourably for the euro on Wednesday. In the current economic landscape, rate differentials hold significant importance, particularly as the dollar is providing positive real yields. A 10-year Treasury yielding 5.278% juxtaposed with US core inflation at 2.6% results in a real return of 2.68%. A 10-year Bund yielding 3.45% juxtaposed with eurozone headline inflation at 3.8% presents a scenario of negative real return. A global investor selecting between the two options can secure over 2.5 percentage points of real yield in Treasuries while experiencing a decline in purchasing power in Bunds. The gap consistently attracts capital toward the dollar, not solely on data release days. The spread elucidates the challenges faced by the euro, despite the European Central Bank’s rate increases. The ECB has raised rates twice this year; however, Bund yields have not aligned with Treasuries due to market perceptions of weaker eurozone growth and a more constrained ECB. The Fed is increasing rates in an environment characterised by 3.7% inflation and ongoing positive growth. The ECB is increasing rates amidst the potential for stagflation risks. For the forecast, the 182-basis-point 10-year spread is the key indicator to monitor. A move above 190 basis points, driven by Treasuries breaking 5.364%, would likely push EUR/USD toward 1.1000. A narrowing toward 170 basis points would provide the euro with the opportunity to retest 1.1250.
