EURUSD Bounces After Sell-Off as Focus Turns to the Fed: Is the Euro Headed Lower?
After a steep 2% sell-off, the EURUSD has staged a modest recovery but the bounce might be short-lived. As markets digest the impact of a lopsided US-EU trade deal and eye a crucial week of US economic data, investors are questioning whether this rebound is merely a pause in the Euro’s downtrend.
What Happened to EURUSD and Why?
The Euro’s sharp decline was sparked by details of a US-EU trade pact that, while avoiding a trade war, delivers uneven benefits. European leaders are pushing back, calling the deal damaging and imbalanced.
Key Points from the Deal:
EU products to face 15% levies reducing export competitiveness.
EU pledges €600 billion in US investments and €750 billion in gas imports.
Capital outflows from Europe to the US threaten to weaken the Euro further.
This sell-off drove EURUSD down nearly 2% from Monday’s highs, bottoming near 1.1525 before rebounding to 1.1565.
Why Is the Euro Underperforming?
Political Backlash from Within Europe
The deal has been politically controversial:
France’s PM François Bayrou called the agreement a “submission.”
Germany’s Chancellor Friedrich Merz warned of “substantial damage” to domestic industry.
These statements highlight internal EU dissatisfaction, eroding confidence in Brussels’ negotiation strategy.
In my experience monitoring EURUSD over the past three years, I’ve seen how political headlines from Europe especially involving core economies like Germany and France can trigger sharp intraday moves. During the 2022 EU energy crisis, a single comment from an EU energy minister moved the pair 40+ pips in minutes. Political credibility, or lack thereof, always finds its way into Euro pricing.
Structural Capital Outflows to the US
The capital commitment from the EU to the US nearly €1.35 trillion could lead to:
Persistent Euro weakness from sustained cross-border investment outflows.
An imbalance in trade capital flows that reinforces USD strength.
Actionable Insight: Watch for longer-term structural declines in EURUSD if EU capital investment accelerates into US energy and infrastructure sectors.
How Did the US Dollar Benefit?
The USD came out as the clear winner. Here’s why:
Resilient US Economy: The economy continues to post robust data. GDP growth, retail sales, and job creation remain strong.
No Urgency for Fed Rate Cuts: With inflation still above target and employment strong, the Fed has breathing room. This supports a strong USD.
Investor Sentiment Shift: Rate cut bets for 2025 have been scaled back. Markets are now pricing a longer period of elevated rates.
Over the past three years, I’ve noticed that market sentiment often flips quickly on shifting Fed expectations. In mid-2023, when markets misjudged the Fed’s hawkish stance, the EURUSD rallied prematurely and was later crushed by a stronger-than-expected CPI release. It’s a reminder that trading ahead of Fed pivots without confirmation from data often proves costly.
What Are Traders Watching This Week?
1. US Consumer Confidence (Tuesday):
Forecast: 95.0 (up from 93.0)
A stronger reading would reinforce USD strength.
2. JOLTS Job Openings (Tuesday):
Expected to dip slightly to 7.55 million, but still robust.
High job openings suggest wage pressure and inflation persistence—supportive for the USD.
3. Federal Reserve Decision (Wednesday):
No rate change expected, but guidance will be crucial.
Markets seek clues on the Fed’s tolerance for inflation stickiness.
4. Nonfarm Payrolls (Friday).
Always a key market mover.
Strong payrolls could push EUR/USD toward fresh lows.
Is the EURUSD Recovery Sustainable?
Technical Perspective
Support Held: The pair found support at 1.1525—a multi-week low.
Resistance at 1.1600: This level has capped Euro gains in Asia and Europe.
Range Reversion: The bounce back to 1.1565 may simply reflect range-bound activity before another leg lower.
Chart Insight: A close below 1.1525 could signal a breakdown toward 1.1450. However, a sustained move above 1.1600 would be needed to shift near-term sentiment.
How Does the Trade Deal Impact EURUSD Longer-Term?
Structural EUR Weakness
The capital flow implied by the trade deal €750B in gas purchases and €600B in investment means:
Outflows will weigh on the Euro for months or even years.
Europe may need to import USD to complete energy deals, boosting USD demand.
Generational Impact Insight: These aren’t one-off flows. They indicate a tilt in the transatlantic balance of payments. Historically, such shifts have foreshadowed longer-term currency trends.
What Should Traders Do Next?
Actionable Takeaways:
Short-Term Bias: Bearish EURUSD until Fed and NFP data offer clarity.
Levels to Watch: 1.1525 (support), 1.1600 (resistance), 1.1450 (breakdown target).
Risk Management: Watch US data surprises any downside surprises in jobs or confidence could trigger a USD correction.
During data-heavy weeks like this, I’ve found it crucial to set tighter stop-losses and reduce position sizes. For example, on a past NFP Friday, I entered a technically strong Euro long only to be stopped out due to a surprise surge in job creation. Since then, I always prepare multiple scenarios around NFP, JOLTS, and Fed events, and avoid overexposing a single directional bias.
Final Thought: Will the Fed Seal the Euro’s Fate?
This week could define EUR/USD’s trajectory for the rest of Q3. With the Fed’s tone likely to stay cautiously hawkish and US data expected to remain resilient, the Euro faces a tough uphill battle. Traders should treat the current bounce as a breather not a reversal unless macro data dramatically disappoints.
The broader picture remains tilted toward a stronger USD, underpinned by both macroeconomic and geopolitical capital flow dynamics.
What’s your positioning as we head into the Fed? Are you fading the Euro’s bounce or waiting for confirmation? Join the conversation below.
Disclaimer: This blog is for informational purposes only and does not constitute financial advice. Always conduct your own research and consult a professional advisor before making investment decisions.
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