Euro dives as US yields overpower ECB hike bets

US Dollar strengthens as Treasury yields rise on inflation concerns.
ECB officials flag June hike if energy shock persists.
Fed minutes loom as markets price year-end hike risk.

Christian Borjon Valencia FXStreet

EUR/USD drops near 1.1600 on Tuesday as the Greenback recovers some ground, supported by soaring US Treasury yields, even though ECB officials opened the door to rate hikes at the June meeting. The pair trades with losses of 0.48% at the time of writing.

EUR/USD falls as rising yields revive Fed hike fears

Financial markets are driven by geopolitics. Mixed headlines from the Middle East keep investors anxious, even though US President Donald Trump decided to halt strikes on Iran scheduled for Tuesday, due to Gulf allies' requests. Recently, he said that the US may need to attack Iran again, but that Tehran is begging for a deal.

Regarding talks between the US and Iran, the US Vice President JD Vance said both countries have made significant progress and that neither is eyeing a resumption of hostilities.

High energy prices had increased speculation that major central banks would need to hike rates. Traders had priced in a 50% chance that the Federal Reserve would lift borrowing costs towards the end of the year, via the CME FedWatch Tool.

The US Dollar Index (DXY), which tracks the buck’s performance against a basket of six currencies, is up 0.35% at 99.30.

Money markets had priced a 50% chance that the Federal Reserve would increase borrowing costs once, towards the end of the year, according to Prime Terminal data.

On Wednesday, investors will look to the minutes from the Fed’s latest policy meeting for insight into how strongly policymakers support shifting from an easing bias toward a neutral stance.

Across the pond, the Eurozone schedule was absent, except for speeches by European Central Bank (ECB) officials. Kocher said that a June rate hike is possible if there’s “no improvement in the Iran war.”

Echoing his comments was Joachim Nagel of the Bundesbank, who stated that the ECB is moving away from a baseline scenario, and that “maybe we have to do something in June.”

Francois Villeroy of the Banque de France said that the central bank “will be ready to act as needed” and that the Iran conflict created risks to growth and inflation.

EUR/USD Price Forecast: Technical outlook

In the daily chart, EUR/USD trades at 1.1606, keeping a bearish near-term tone as spot holds below the cluster of simple moving averages grouped around 1.1648. The pair also trades under the broader descending resistance line traced from the 1.1929 area, while the upward sloping support line that previously underpinned the advance now sits overhead, reinforcing a capped configuration. The Relative Strength Index (14) at roughly 40 remains in negative territory but above oversold, hinting at persistent downside pressure rather than exhaustion.

On the topside, initial resistance is located around the 50/100/200-day simple moving average band near 1.1648, where a daily close above would be needed to ease immediate selling pressure. Further ahead, the former rising support line turned barrier comes in around 1.1759, followed by the recent trend-line-related highs near 1.1796, which together define a broader supply zone limiting recovery attempts while price holds below them.

(The technical analysis of this story was written with the help of an AI tool.)

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.

Author

Christian Borjon Valencia

FXStreet

Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.

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