The more fundamentally sound an economy is, the higher the interest rates it can digest without compromising its growth. This is the very principle currently dictating market logic. A surge in US business activity to highs not seen since 2021, combined with the staunchly “hawkish” rhetoric of FOMC officials, has driven the probability of an October rate hike to 70%. This has triggered the sharpest rally in Treasury yields since April 2025. Against this backdrop, the fall of EURUSD to the first of two targeted levels (1.14 and 1.13) was merely a matter of time.
Inflationary risks in the US have not disappeared. In September, the index of prices for materials and supplies purchased by supply managers posted its fastest growth in four years. Notably, fuel and logistics costs have surged amid a spike in oil prices over the month. All of this will inevitably be passed on to end consumers and will stoke inflation in the coming quarters.
In an attempt to appease the electorate ahead of the midterm elections, Donald Trump has imposed a ban on diesel fuel exports. While politically logical, this move is economically short-sighted: administrative measures will only suppress domestic prices in the short term, whereas on the global market, a reduction in supply will act as a powerful “bullish” trigger. And once again, the Old World is the primary casualty of this decision.
Europe, already suffering from an energy deficit due to the loss of Russian and Middle Eastern volumes, is now being cut off from US supplies as well. Diesel prices have already skyrocketed by a colossal 135% year-to-date, and alarmingly low gas storage levels paint grim parallels with the 2022 energy shock. It was that very crisis that drove the euro below parity with the dollar at the time.
The situation is being compounded by the deepening political crisis in France, which exponentially increases the likelihood of forced ECB intervention in the Eurozone government bond market. EURUSD is slipping inexorably downward. Not even positive local factors are helping: the rise in European business activity to three-year highs and upwardly revised OECD GDP forecasts for the region are simply being ignored by the market.
In stark contrast, the US economy is demonstrating enviable resilience, and interest rates remain high. What seemed debatable just recently is now perceived as an axiom: the September start of the Fed’s tightening cycle was an absolutely correct decision. Robust macroeconomic data, uncompromising statements from the FOMC, and Kevin Warsh’s actions, which have finally dispelled myths about White House pressure on the Fed, are creating a perfect storm for the greenback’s strengthening. The euro, in its current state, simply has no cards left to play.
As expected, EURUSD easily hit the first target for short positions at the 1.14 mark. However, the story may not end there. Looming political and energy turmoil in Europe risks pulling the quotes down to the next level: $1.12. The fundamental picture continues to dictate a single strategy: sell.
