EUR/USD stays under pressure despite rebound

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EUR/USD rebound faces strong resistance

Eurozone growth improves, inflation complicates ECB outlook

Fundamental conditions in eurozone look better than euro price action might suggest. Regional economy expanded by 0.6% q/q and 1.2% y/y in second quarter, while September Composite PMI rose to 53.1, pointing to further expansion in business activity.

Germany is also showing signs of recovery, with Composite PMI reaching 53.8, although inflation remains a problem. German CPI accelerated to 2.9% y/y in August, with energy prices accounting for much of pressure. In France, August inflation rose to 2.4% from 2.1% in July, making today's September price data from region's largest economies particularly important for market reassessment of ECB rate path.

ECB already raised rates by 25 basis points on September 10, taking deposit rate to 2.50%, and signaled that renewed inflation impulse, driven mainly by expensive energy and conflict in Middle East, does not allow it to quickly bring tightening cycle to an end. In its new projections, central bank expects average inflation of 3.0% in 2026 and 2.5% in 2027, with price growth moving closer to target only afterward.

For euro, this provides some support through rate channel, but effect remains limited: higher energy prices are also worsening outlook for European consumption and industry. As a result, another ECB rate hike on its own would no longer guarantee a sustained rise in EUR/USD.

Treasury yields keep dollar supported

Dollar, meanwhile, continues to receive stronger support from U.S. rates. Following September increase, Federal Reserve's target range stands at 3.75–4.00%, while recent comments from policymakers suggest that fight against inflation is not yet over. Michael Barr said on September 29 that inflationary pressure remains persistent and that policy needs to stay sufficiently restrictive, while U.S. Treasury yields remain near multi-year highs.

1.1390 remains key upside barrier

As a result, market continues to favor dollar even as European data improve. Nearest resistance now lies around 1.1365–1.1370, although 1.1390–1.1400 area is much more important, as it previously acted as support. As I noted in EUR/USD tests yearly lows as yield gap favors the dollar, as long as pair remains below that zone, current move looks more like a correction after decline. A move back below 1.1330 would again increase risk of a fall toward 1.1310, followed by 1.1300–1.1280.

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