The euro has entered a correction phase after its recent rally, despite strong inflation data from the eurozone. The EUR/USD pair has moved down toward the 1.1600 level as investors prefer to take profits and shift back into the dollar amid rising global risks and increased demand for safe-haven assets.
Additional pressure comes from uncertainty surrounding the situation in the Middle East and persistently high energy prices.
The market ignores inflation and focuses on the dollar
Although inflation in the eurozone accelerated to 3.2%, increasing the likelihood of a hawkish stance from the ECB at the June meeting, this factor is not providing sufficient support for the single currency. Market participants believe that a rate hike is already largely priced in, so attention is shifting to the relative resilience of the U.S. economy and the higher interest rate levels set by the Federal Reserve.
Geopolitics and risk-off sentiment weigh on the euro
The main driver of the current decline is the shift of investors into the dollar as a safe-haven asset. Rising geopolitical tensions and risks to energy supply support demand for the U.S. currency. As a result, the euro is weakening despite growing expectations of ECB tightening, indicating that external factors are outweighing internal European drivers.
Near-term outlook
The current decline of EUR/USD toward the 1.1600 support increases the risk of a breakdown and a test of 1.1580. A break below this level would open the way toward 1.1550. In the coming days, the key event will be the ECB meeting: if Christine Lagarde does not signal further tightening beyond June, pressure on the euro may persist. The near-term scenario is consolidation with a risk of testing lower levels, despite the still positive medium-term fundamental outlook for the euro, as previously noted in Euro holds support ahead of ECB decision.
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