“Faster, Higher, Stronger”—this Olympic motto perfectly captures the current trajectory of the Federal Reserve. The US regulator is tightening monetary policy far more aggressively than the European Central Bank. Combined with the fundamental resilience of the US economy and the higher yields of domestic assets, this has created a perfect storm for the single currency, driving the EURUSD pair to 16-month lows. Furthermore, emerging doubts about the perpetuity of this tightening cycle fail to deter the “bears” in the slightest.
It seemed a turning point had arrived following a speech by New York Fed President John Williams. His comments sent a shockwave through the financial markets: within a single day, the probability of a Fed rate hike plummeted from 73% to 38%. Under any other circumstances, this would have inevitably triggered a corrective bounce in EURUSD. The pair did indeed begin to price in this “dovish” surprise, but the “bulls'” euphoria was short-lived: a fresh batch of US macroeconomic data quickly brought the market back down to earth.
The upward revision of US Q2 GDP (from 1.6% to 2.2%), coupled with an acceleration in the Personal Consumption Expenditures (PCE) index to 0.3% m/m in August, sent a clear message: the US economy is operating at full capacity. This implies that even a hypothetical drop in oil prices, driven by the normalization of Middle Eastern supplies, will not allow Treasury yields to drop significantly. Holding firm near 24-year highs, Treasuries will continue to act as a powerful magnet for capital fleeing Europe for North America, thereby sustaining the bearish trend in EURUSD.
The capital flight from the Old World is further exacerbated by an impending political and fiscal crisis. Ahead of the 2027 elections in France, the polling numbers for Marine Le Pen and Jean-Luc Mélenchon are steadily climbing, automatically driving up the yields on French government bonds. Neither the right nor the left is prepared for austerity, which, against the backdrop of an economic slowdown, is leading to a widening budget deficit (projected to grow from 5.1% to 5.4% of GDP). The new budget proposal is expected to trigger a sharp clash between parliament and the government in the coming days, posing a very real threat of the Prime Minister’s resignation. Under these conditions, the question of “how not to flee Paris?” becomes entirely rhetorical.
September inflation data in the Eurozone only added fuel to the fire, yet paradoxically failed to support the single currency. In Spain, price growth surged to 5% (a three-year high, more than double the ECB’s 2% target). In Italy, consumer prices hit their highest levels since 2023, and in France, since 2024. The broader Eurozone CPI is expected to accelerate to 3.7%.
Theoretically, this should push the ECB toward more aggressive policy tightening. In practice, however, the odds of a deposit rate hike in October have fallen from 31% to 22%. The regulator is clearly wary of triggering a debt crisis via a sharp spike in yields amid political instability, opting for a “first, do no harm” approach. For the euro, this forced passivity from the central bank translates into further losses.
