EUR/USD slides as ECB officials maintain cautious tone, Dollar rebounds on risk optimism

Executive summary (key takeaways)

• Price Action: EUR/USD trades near 1.1627, extending its slide for a fourth consecutive session. The pair has broken below the 1.1630 technical floor, testing the 161.8% Fibonacci extension as bearish momentum accelerates.

• Macro Drivers: A modest rebound in the US dollar and fading eurozone inflationary pressures weigh on the pair. German PPI data fell again, highlighting disinflationary risks, while ECB officials including Lane and Lagarde maintain a cautious tone ahead of the October ECB meeting.

• Strategy: Maintain bearish bias below 1.1650 with short-term targets at 1.1615 and 1.1585. The base scenario assumes continued USD strength amid stable yields and mild risk-on sentiment.

Market overview

The euro extended its recent decline against the US dollar on Tuesday, slipping to 1.1627 amid renewed dollar demand and continued soft eurozone data. The move reflects a broader theme of consolidation in currency markets, with traders rotating toward the greenback as optimism around a potential US-China trade deal steadied risk sentiment.

The pair has fallen nearly 0.5% this week, reversing gains from early October when softer US inflation temporarily boosted the euro. As of writing, the dollar index (DXY) has recovered to 98.77, up 0.16%, driven by higher US yields and easing financial sector jitters.

Eurozone sentiment remains fragile. Monday’s German Producer Price Index (PPI) dropped 0.1% month-on-month in September, following a 0.5% decline in August. The figure underscored ongoing disinflationary trends in Europe’s largest economy, intensifying expectations that the European Central Bank will keep policy accommodative for longer.

During Monday’s policy discussions, ECB Executive Board member Isabel Schnabel reiterated that “underlying inflationary pressures remain subdued,” while Bundesbank President Joachim Nagel acknowledged that energy prices have eased but warned that “growth headwinds are still significant.”

Euro’s weakness reflects “a combination of structural disinflation in Germany, cautious ECB communication, and a modest rebound in US Treasury yields.” He added that “the short-term technical setup favors further downside toward 1.16 unless Lagarde delivers a stronger message on inflation expectations.”

The market narrative remains one of relative monetary divergence. With the Fed expected to cut rates modestly later this year but still maintaining higher nominal yields, while the ECB appears content to hold steady amid sluggish data, the interest rate differential continues to favor the US dollar.

For now, EUR/USD remains vulnerable to further declines, with traders awaiting speeches from ECB officials including Chief Economist Philip Lane and President Christine Lagarde later today for additional policy cues.

Technical analysis

Current technical conditions and main scenario

EUR/USD trades at 1.1627, positioned near the 161.8% Fibonacci extension of the 1.1655–1.1638 swing. The short-term structure is decisively bearish, as confirmed by lower highs, lower lows, and sustained trading below the hourly WMA at 1.1662.

The Bollinger Bands continue to widen, signaling volatility expansion and a trending environment rather than mean reversion. The price is currently hovering just below the lower band near 1.1629, confirming active downward momentum.

The main scenario anticipates continued pressure toward the 200% Fibonacci projection at 1.1621, followed by the 261.8% extension at 1.1611. Momentum remains strong enough to challenge 1.1585 later this week if macro conditions stay supportive for the dollar.

Volume patterns reinforce this view: successive red candles with rising sell-side participation suggest active distribution. Until EUR/USD reclaims the 1.1650–1.1660 resistance zone, rallies are expected to be short-lived and corrective.

The primary bias therefore remains bearish, targeting incremental declines within the 1.1615–1.1585 zone before stabilization or profit-taking emerges.

Oscillators and momentum indicators

• MACD: The MACD histogram is below zero, with signal lines diverging downward, confirming active bearish momentum. The lack of divergence between price and indicator underscores trend strength rather than exhaustion.

• MFI: The Money Flow Index stands near 22.5, indicating that the pair is entering oversold territory. However, in a strong downtrend, MFI oversold conditions often precede short-lived consolidations rather than full reversals.

• ATR: The Average True Range remains stable around 0.0009, suggesting controlled but directional volatility. This aligns with a trend-driven rather than panic-driven market.

Momentum conditions support a bearish continuation bias, but traders should monitor intraday price action near 1.1620–1.1610 for potential short-term stabilization.

Key levels

• Resistance:
  • 1.1650 – Immediate technical barrier and hourly swing high.
  • 1.1665 – WMA resistance and upper Bollinger midpoint.
  • 1.1690 – Prior intraday top, psychological level.
• Support:
  • 1.1621 – 200% Fibonacci extension and immediate pivot.
  • 1.1611 – 261.8% projection, key downside target.
  • 1.1585 – Structural support from October 9 lows.

Sustained trade below 1.1635 keeps the bearish scenario active. Only a daily close above 1.1665 would neutralize the short-term downside bias.

Alternative scenario (bullish correction)

A less likely scenario involves a temporary rebound above 1.1655 on profit-taking or dovish US data. In that case, EUR/USD could retest 1.1665 and potentially 1.1690 before encountering renewed selling pressure. This corrective move would likely occur if ECB speakers strike a surprisingly optimistic tone or if US yields retreat from current levels. However, such a rebound is expected to remain capped as long as price remains below 1.17.

Fundamental outlook

Eurozone economic conditions

The euro’s latest decline is closely tied to weaker inflation signals and cautious ECB communication. Monday’s German PPI decline of -0.1% marked the sixth consecutive monthly drop, reflecting easing cost pressures in manufacturing. While lower input costs may help industry margins, they reinforce the narrative of sluggish consumer price growth across the bloc.

This comes as ECB policymakers face a dilemma: while inflation has slowed meaningfully, growth indicators remain too weak to justify aggressive tightening. With energy prices stabilizing and real wage growth still subdued, policymakers are signaling patience rather than urgency.

Christine Lagarde is scheduled to speak twice this week, with today’s address expected to reaffirm the ECB’s gradual approach. Market participants anticipate her to emphasize data dependence and to avoid any premature tightening rhetoric ahead of October’s policy meeting.

Meanwhile, ECB Chief Economist Philip Lane has maintained that “transmission lags” justify waiting to assess the full impact of past rate hikes. This cautious tone, coupled with Germany’s manufacturing weakness, limits the euro’s ability to rebound sustainably.

Broader market sentiment

Risk sentiment globally remains mildly constructive following signs of progress in US-China trade talks. US President Donald Trump stated on Monday that he expects to “reach an agreement soon” with President Xi Jinping, while White House adviser Kevin Hassett suggested that the prolonged US government shutdown “could end within days.”

Such optimism typically benefits risk assets but paradoxically supports the US dollar in the current environment, as investors rotate toward US-denominated instruments amid stable yields and relative macro outperformance. The euro, by contrast, lacks supportive catalysts amid domestic stagnation and fading inflationary impulses.

US economic drivers

The dollar’s moderate strength also reflects positioning ahead of next week’s Federal Reserve policy meeting. Markets continue to price in a 25bps rate cut, but expectations for a December follow-up are less certain. Fed Governor Christopher Waller’s remarks later today may offer fresh insight into the central bank’s assessment of inflation risks.

Recent US data has painted a mixed picture—solid retail spending and resilient labor demand offset by weakening business sentiment. Yet compared to the eurozone, the US macro backdrop still appears firmer, allowing the Fed to maintain a more balanced stance.

This divergence keeps the yield spread between US Treasuries and German Bunds stable around 180 basis points, reinforcing downside pressure on EUR/USD. Unless upcoming US releases disappoint materially, this interest rate differential will remain a key drag on the euro.

Macro calendar highlights

This week’s key events are heavily skewed toward central bank commentary rather than hard data:

• Tuesday (Oct 21): ECB Lane and Lagarde speeches – markets watching for tone on inflation and growth.

• Wednesday (Oct 22): Lagarde and De Guindos to speak; ECB officials likely to reiterate gradualism.

• Thursday (Oct 23): German Buba Vice President Buch addresses financial stability; tone expected to remain cautious.

• Friday (Oct 24): No major eurozone data; focus shifts to US PMIs and bond auction results.

From the US side, Tuesday’s business inventories and leading index are expected to show modest growth, confirming resilience in supply chains. If confirmed, this could add incremental support to the dollar through week’s end.

Strategic positioning

The overall setup for EUR/USD remains structurally bearish in the short term. Traders should maintain short exposure below 1.1650 with initial profit targets at 1.1620–1.1610 and extended objectives at 1.1585.

For swing traders, risk management is crucial: stops above 1.1665 are recommended to protect against false rebounds. Medium-term participants should watch for any shifts in ECB tone—an acknowledgment of persistent weakness could accelerate declines toward the 1.1550 region.

Institutional positioning remains moderately short, as reflected in the latest CFTC data. The broader market remains aligned with expectations of a range-bound dollar environment, but near-term momentum favors the greenback.

Trading takeaways

1. The euro’s weakness is driven by disinflation in Germany and cautious ECB rhetoric.

2. Technical momentum remains bearish, with the pair holding below 1.1650 and eyeing 1.1610 as the next target.

3. Oscillators show oversold readings but lack reversal confirmation, suggesting continuation before stabilization.

4. Macro focus today rests on ECB speeches and risk sentiment surrounding US-China developments.

5. Strategy: Sell rallies below 1.1650; target 1.1620 and 1.1585, stop above 1.1665.

Conclusion

EUR/USD remains under pressure, with sellers firmly in control as the euro struggles to find fundamental support. The combination of weak German producer data, cautious ECB communication, and a resilient US dollar points to further downside potential in the short term.

From a technical standpoint, the pair’s breach of 1.1630 reinforces a bearish continuation pattern, with room for further losses toward 1.1610 and potentially 1.1585.

The euro’s decline isn’t a panic move but a reflection of consistent macro divergence—Europe’s soft growth contrasts with the US’s relative stability. Until the ECB offers a clearer growth strategy or US yields retreat, EUR/USD will likely trade heavy below 1.17.

With no major data surprises expected before Lagarde’s remarks, the pair is likely to remain anchored in a bearish tone through midweek, awaiting a fresh catalyst from central bank communication or US macro releases.