What is driving the US Dollar to multi-month highs against the Euro as PCE data approaches?

EUR/USD has dropped to its lowest level since mid-2025 as the US Dollar (USD) maintains broad-based momentum, propelled by elevated long-dated US Treasury yields and shifting expectations for Federal Reserve (Fed) monetary policy. While recent US labor and consumer sentiment indicators have shown signs of moderation, market participants are closely monitoring upcoming ADP payrolls and PCE inflation data to gauge the likelihood of an October rate hike. Institutional strategists from Commerzbank and ING present differing views on the sustainability of the Greenback's rally, debating whether current valuations are overstretched relative to rate differentials or firmly anchored by broader bond market dynamics.

Fed policy scenarios suggest fragile backdrop for US Dollar strength

According to Thu Lan Nguyen at Commerzbank, EUR/USD’s decline to mid-2025 lows reflects elevated pricing for Fed tightening relative to the European Central Bank (ECB). However, because the US Dollar appears stretched against underlying interest rate differentials, any failure by the Fed to signal further rate increases could leave Greenback gains vulnerable to a moderate pullback.

"The Fed raises rates and signals its willingness to tighten further. In this case, the Dollar is likely to hold on to its gains... Against this backdrop, I would still regard the current Dollar strength as rather fragile, not least because it already appears overstretched even relative to developments in the Euro Area-US interest rate differential."

Resilient bond sell-off and PCE risks prevent premature US Dollar top

Taking a more supportive view on the Greenback, Francesco Pesole, Frantisek Taborsky, and Chris Turner at ING emphasize that elevated long-end yields and persistent risk aversion continue to buffer the US Dollar against soft economic releases. With upcoming PCE inflation and employment data capable of driving October Fed hike odds higher, calling a top in the US Dollar move remains premature.

"Even so, a 0.4% MoM core PCE print could lift the October hike pricing again close to 20bp if supported by jobs figures too... Some stabilisation in risk sentiment could take some shine off the dollar rally, but today's data will have a big say. With room for markets to reprice a higher probability of an October Fed hike, it may be premature to call the top in this dollar move."

The takeaway

Based on the combined perspective of both financial institutions, EUR/USD remains under persistent pressure as US rate expectations and yield dynamics continue to favor the greenback. While Commerzbank cautions that Dollar strength is structurally fragile and vulnerable to a dovish recalibration of the Fed's rate path, ING maintains that elevated long-end yields and potential hawkish surprises in PCE inflation will keep any near-term Dollar correction firmly contained.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)