EURUSD Surges Toward Multi-Year High as Stagflation Fears Weigh on US Dollar.
As the financial markets open for the week, the EURUSD currency pair is on a bullish tear, soaring toward the 1.1400 mark and potentially eyeing its highest level in over three years. The recent surge is driven not only by weakening US economic indicators but also by a looming stagflation threat—a rare and troubling mix of rising inflation, sluggish economic growth, and cooling labor markets.
The pair’s momentum coincides with intensified selling pressure on the US Dollar Index (DXY), which recently dropped below the psychological support of 99.00. At the heart of this sell-off lies the escalating US-China trade war, deteriorating consumer sentiment, and inflation expectations that seem to be spiraling out of control.
Let’s unpack the complex factors behind this forex move and analyze what might be next for the EURUSD pair.
The Core Driver: Fears of Stagflation in the US Economy
In normal economic cycles, central banks like the Federal Reserve use interest rates to control inflation and stimulate growth. However, when an economy is hit with high inflation and low growth simultaneously, the effectiveness of monetary tools diminishes—this is the stagflation trap.
Recent data suggests that the United States may be inching closer to this trap:
University of Michigan Consumer Sentiment Index plummeted to 50.8 in April—its lowest reading since June 2022.
One-year forward inflation expectations, based on the same survey, surged to 6.7%, up from 5% in March.
The US-China trade war has escalated significantly, with mutual tariffs reaching as high as 145% and 125%, respectively.
Together, these elements paint a picture of an economy that’s struggling to balance inflation control and economic growth, pushing investors away from the USD and toward alternative assets like the euro.
How the Trade War Is Feeding Market Anxiety
Trade tensions between the world’s two largest economies have reached a boiling point.
Last week, US President Donald Trump announced fresh tariffs on Chinese imports, jacking up rates to 145%. In retaliation, China imposed counter-tariffs of up to 125% on US goods, effective immediately. The tit-for-tat moves are reigniting concerns from the 2018-2019 trade war era, when global growth slowed significantly.
Why this matters for the forex market:
Risk-off sentiment: Investors typically flee to safer assets when global tensions rise. However, in this case, stagflation fears in the US are weakening the dollar’s safe-haven appeal.
Supply chain disruption: Tariffs increase production costs, which ultimately fuels inflation. At the same time, businesses may delay investments, impacting overall GDP growth.
Investment pullback: With no clear resolution in sight, foreign and domestic capital may hesitate to invest in US assets, further weighing on the dollar.
ECB Rate Cut: A Strange Source of Euro Strength?
Interestingly, part of EURUSD’s upward momentum is also being driven by the expectation of a rate cut by the European Central Bank (ECB) this Thursday. Typically, rate cuts weaken a currency. But in this case, investors are betting that the Eurozone will emerge as a net beneficiary of the trade war.
Here’s why:
As the US and China impose tariffs on each other, China may redirect exports to Europe, which could drive down consumer prices in the Eurozone due to China’s lower production costs.
A non-inflationary environment in the Eurozone could allow the ECB to safely ease monetary policy to stimulate growth.
ECB officials have confirmed a dovish stance: Governing Council member Gediminas Šimkus recently confirmed a 25 bps rate cut is “needed in April,” particularly in light of US protectionism.
Thus, the euro’s strength is not necessarily a vote of confidence in the Eurozone’s economic health, but rather a reflection of relative stability compared to the US.
Fed’s Dilemma: Caught Between Inflation and Recession
The Federal Reserve’s tightening cycle, which saw rates peak above 5%, had begun to show signs of effectiveness earlier this year. However, rising inflation expectations and falling consumer confidence have now clouded the outlook.
St. Louis Fed President Alberto Musalem issued a warning on Friday, emphasizing that long-term inflation expectations must be contained. If consumers begin to expect persistently high inflation, the Fed’s credibility—and therefore its policy effectiveness—could be compromised.
Complicating matters:
The labor market is beginning to show cracks, with job creation slowing.
Real wages remain stagnant, eroding purchasing power.
Corporate earnings are increasingly under pressure due to supply chain instability and declining consumer demand.
This leaves the Fed with few options:
1. Pause hikes and risk inflation running hot, or
2. Continue tightening and risk a full-blown recession.
Either way, the dollar suffers, and the EURUSD continues to climb.
Technicals: Can EURUSD Break the 1.1474 High?
From a technical perspective, EURUSD is fast approaching the 1.1400 psychological resistance, with 1.1474 (the July 2021 high) as the next big target.
Key technical insights:
RSI (Relative Strength Index) on the daily chart is nearing overbought territory, but still has room to run.
200-day moving average remains well below the current price, confirming a bullish trend.
A daily close above 1.1400 could act as a breakout signal, inviting more buyers and potentially triggering a rally toward 1.1500 and beyond.
However, traders should be cautious of any hawkish surprises from the ECB or unexpected cooling in US inflation data, which could cause a sharp pullback.
What’s Next for Forex Traders?
The forex landscape is shifting rapidly, and EURUSD is caught in a whirlwind of macro forces, geopolitical tensions, and monetary policy divergence.
Key events to watch this week:
ECB interest rate decision (Thursday)
US inflation and retail sales data
Any developments in US-China trade relations
Comments from Fed officials on forward guidance
Each of these could significantly alter sentiment and spark volatility across forex markets.
Conclusion: EURUSD Bulls Ride the Storm, But Risks Remain
The EURUSD surge is driven by a perfect storm of US economic weakness, geopolitical stress, and euro resilience. While the pair is poised to challenge multi-year highs, the underlying drivers—stagflation, trade wars, and central bank pivots—are inherently unstable.
Traders should brace for continued volatility and stay alert to any surprises from upcoming economic data and central bank meetings.
