Key Takeaways

• Euro hits 1.16 low: The euro fell sharply to 1.16 against the U.S. dollar, reaching its lowest level in several months.
• Conflicting economic signals: Mixed eurozone and U.S. data fueled uncertainty about growth and inflation prospects on both sides of the Atlantic.
• Diverging policy outlooks: The European Central Bank’s cautious approach contrasts with renewed signals of Fed tightening, weighing on the euro’s trajectory.
• Traders pivot on sentiment shifts: Volatility increased as traders rebalanced positions in response to shifting macroeconomic narratives.
• Market eyes next central bank meetings: Attention turns to upcoming ECB and Fed policy meetings for further guidance on rate path and currency direction.

Introduction

The euro slipped to 1.16 against the U.S. dollar on Tuesday, reaching a multi-month low as traders responded to conflicting economic data from both the eurozone and the United States. With uncertainty intensifying around diverging central bank policies and mixed economic signals, market participants now await the upcoming ECB and Fed meetings for clearer guidance on the currency’s direction.

Euro Hits New Lows Amid Market Volatility

The euro declined to 1.16 against the dollar on Tuesday, its lowest point since March. Conflicting economic data from both regions unsettled investors. Trading volumes surged, exceeding €2.8 billion on major platforms during the European session.

Weakness extended beyond the dollar pair. The euro dipped 0.4% against the British pound to 0.8550 and fell 0.7% against the Japanese yen to 161.25. This broad-based decline signals fundamental euro weakness, although the dollar index (DXY) also climbed to 102.8.

According to institutional positioning reports, momentum is building behind the trend. Sarah Westberg, currency strategist at BNP Paribas, stated that large speculators have increased their net short positions on the euro by 18% over the past two weeks. She noted this shift reflects growing conviction in the diverging narratives between the U.S. and eurozone economies.

Conflicting Economic Indicators Drive Volatility

Recent eurozone economic data presented a mixed outlook, adding to market uncertainty and the euro’s fall. Manufacturing PMI figures registered 45.6, below the 46.2 forecast, and remained deep in contractionary territory.

In contrast, U.S. economic indicators outperformed expectations. The ISM services index reached 54.5, above the consensus estimate of 53.9, marking the 41st consecutive month of expansion in the sector.

Marcus Höllerer, chief economist at Deutsche Bank Research, explained that economic momentum is diverging clearly. While U.S. growth remains resilient despite higher rates, he pointed to ongoing weakness in key eurozone economies such as Germany and Italy.

Inflation data further complicates the outlook. Eurozone headline inflation declined to 2.6% year-over-year, while U.S. PCE inflation remains above target, presenting distinct policy challenges for each central bank.

Central Bank Policy Divergence

The Federal Reserve and European Central Bank appear increasingly set on different policy paths, intensifying pressure on the euro. Markets now forecast roughly 50 basis points of Fed rate cuts by year-end. This is significantly less than the 100 basis points anticipated earlier in January.

For the ECB, the urgency is growing. Elena Fernandez, senior economist at Société Générale, stated that the slowdown in the eurozone is too significant for the ECB to ignore. She expects that policy easing may begin as soon as July, regardless of whether inflation has reached the official target.

Interest rate differentials continue to strengthen the dollar’s position. The yield spread between U.S. and German two-year bonds widened to 185 basis points, its highest level in three months. This spread makes dollar-denominated assets more attractive compared to euro assets.

Technical Analysis and Trader Positioning

The euro has breached several technical support levels, pointing to ongoing downside risk. The EUR/USD pair fell below both the 200-day moving average and the psychologically important 1.17 level in quick succession.

Chart analysis now suggests a move toward 1.15, which has provided significant support in past declines. The relative strength index (RSI) stands at 38, not yet in oversold territory, implying there could be more room for declines before technical factors trigger a correction.

Takahiro Yamamoto, technical analyst at Nomura, commented that a break below 1.17 opens the possibility of a move toward 1.15 or even 1.13 if fundamental pressures persist. Recent daily chart patterns show consecutive bearish engulfing formations, commonly signaling continued downward momentum.

Options data confirms increased demand for protective euro puts. The 25-delta risk reversal is now skewed more strongly toward euro puts over dollar calls.

For traders seeking to understand the significance of technical support levels and indicators like RSI, reviewing technical analysis fundamentals can be invaluable.

What Traders Are Watching Next

The focus now shifts to major upcoming events. The ECB holds its monetary policy meeting next Thursday, with markets assigning a 65% probability to unchanged rates while closely monitoring any shifts in forward guidance. Fed Chair Jerome Powell is set to testify before Congress on Wednesday and Thursday, providing potential insight into the Fed’s rate strategy.

Friday brings key U.S. employment data, with the Non-Farm Payrolls report expected to show job growth of 180,000 and an unemployment rate steady at 3.7%, according to economists surveyed by Bloomberg. Meaningful deviations could prompt significant currency moves.

In Europe, retail sales figures are due tomorrow at 10:00 CET, with consensus forecasts anticipating a modest 0.3% monthly increase after months of decline. Additionally, German factory orders, set for release Thursday at 8:00 CET, will be closely watched for indications of manufacturing sector strength.

With volatility elevated, cultivating a resilient trading psychology is critical for managing sudden market shifts and trader performance.

Conclusion

The euro’s decline to new lows underscores sustained pressure from diverging economic conditions and policy trajectories between the eurozone and the United States. In the current environment, disciplined attention to global macro signals and interest rate developments remains essential. What to watch: upcoming ECB policy guidance, U.S. Fed testimony, and data releases including retail sales, German factory orders, and U.S. employment numbers. All are poised to influence the next phase of currency momentum.

For those developing strategies to navigate this climate, explore proven trading strategies that integrate both technical and macroeconomic factors for better trade planning.