EUR/USD Breaks Lower as Bond Rout Hits Europe

EUR/USD dropped sharply on Thursday falling toward the low-1.12s as the U.S. Dollar surged alongside still-elevated Treasury yields. The U.S. 10-year briefly reached roughly 5.34%, its highest level since 2002, as markets wrestled with persistent inflation, elevated energy prices, heavy government borrowing, and expectations for additional Fed tightening. The Euro could not keep pace even with stronger Eurozone manufacturing data, as the global bond selloff favored the U.S. Dollar and pushed investors toward dollar liquidity. 

The Euro side of the trade is increasingly about the collision between inflation and sovereign risk. September inflation accelerated sharply across several major economies, keeping additional ECB hikes in play, while French yields approached 5% and the France-Germany spread widened toward levels last seen during the height of Eurozone debt crisis. In the final thirty minutes of European trading today, the Italian-German 2-year yield spread widened out by 20-bps, a remarkably aggressive move in a short period of time. Nevertheless, ECB officials continue to emphasize price stability rather than defending individual sovereign spreads. That leaves the Euro in a tough spot: higher inflation argues for tighter ECB policy, while tighter policy is simultaneously exposing fiscal stress across the bloc. 

EUR/USD Daily Price History

The 1.1325 area had been the floor for EUR/USD through June and July, and today’s move sliced straight through it. Price is now trading near 1.1240, below every major moving average, with the short-term averages rolling lower and the longer averages stacked overhead. That is a clean bearish breakdown. Momentum confirms it. MACD is firmly negative with the histogram expanding lower, so downside pressure is still building. Stochastics are buried near oversold, which raises the odds of a reflex bounce, but that does not change the structure; the pair can bounce and still be bearish. The first job for the Euro is simply reclaiming 1.1325. Until then, prior support has become resistance.

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