EUR/USD tests major support as U.S. yields keep dollar pressure elevated
EUR/USD is trading around 1.1380 on September 28 after three weeks of declines and has effectively reached one of the most important technical zones of recent months. At the end of last week, the pair fell to around 1.1358–1.1360, but sellers have so far failed to extend the move lower.
1.1264
1.1236
The 1.1325–1.1360 area now looks key: July lows, the rising trendline from the summer lows, and levels from which noticeable upward impulses previously began all converge here.
U.S. Treasury yields remain the key pressure point
The main pressure is still coming from the U.S. bond market. The yield on 10-year U.S. Treasuries pulled back from recent highs to around 5.16% by the end of Friday, but on Monday it is rising again by around 4 bps amid higher oil prices and renewed inflation concerns.
The long end of the curve is even more telling: the 30-year yield stood at around 5.49% on September 25, compared with around 5.29% several days earlier. This repricing of long-term rates makes dollar-denominated assets more attractive and at the same time shows that the market is demanding an increasingly large premium for inflation and fiscal risks. As a result, even local declines in yields are now quickly used for renewed demand for the dollar, while EUR/USD is still not receiving sustainable support from the bond market.
Fed expectations continue to favor the dollar
An additional advantage for the dollar comes from changing expectations for the Fed. After the September rate hike to 3.75–4.00%, Fed officials continue to say that the fight against inflation is not over, while the market is once again allowing for another rate increase as early as this autumn. At the same time, strong U.S. data provide little reason to expect a rapid cooling of the economy.
This week, attention is shifting to inflation data, PCE, and especially Friday’s labor market report: strong figures could push yields higher again and return EUR/USD directly to the lower boundary of the support area. The situation is also more difficult for the euro because expectations for another ECB rate hike are noticeably less aggressive than the repricing of the Fed’s rate path.
Strong support raises the chance of a corrective rebound
After breaking strong support around 1.1400–1.1390, the pair reached a support area beginning from the 1.1360 level, where, as noted in EUR/USD pressured by stronger U.S. data and rising Treasury yields, the probability of profit-taking on short positions and the development of an upward correction is increasing, although this does not rule out a decline toward 1.1330.
Before a correction develops, a further decline and consolidation within the range are possible.
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