Euro Pressured by Policy Divergence as ECB Lags Fed Outlook

Key Takeaways:

*Markets increasingly price in a slower, shallower ECB easing path compared with the Fed, but weaker Eurozone growth keeps the euro under pressure.

*Headline CPI eased to 2.1% YoY and core to 2.4%, reinforcing the ECB’s cautious stance while wage growth remains a concern for policymakers.

*Weak industrial activity and sluggish exports leave the Eurozone more vulnerable to global growth slowdowns compared with the U.S.

Market Summary: 

The Euro has come under pressure as markets increasingly factor in divergent policy paths between the European Central Bank (ECB) and the Fed.  Recent inflation data showed headline CPI easing to 2.1% year-on-year, while core inflation moderated to 2.4%, aligning with the European Central Bank’s (ECB) disinflation narrative. However, ECB officials have maintained a guarded tone, warning that wage growth remains uncomfortably high and could delay any rate cuts until Q2 2025. While the ECB has not been overtly dovish, it faces a more challenging growth backdrop: weak industrial activity, fragile export momentum and a relatively constrained inflation environment compared to the U.S. With the dollar firming, EUR/USD is therefore pressured.

Structural and cyclical factors are also at play. The Eurozone’s external exposure means that any global growth slowdown is amplified, whereas the U.S. economy retains greater internal demand strength. That means that in a “growth concern” scenario, the euro may weaken further relative to the dollar. In addition, the ECB has less room to surprise hawkishly unless inflation significantly overshoots, which limits upside potential for the euro.When risk appetite is strong and carry/commodity flows dominate, EUR can benefit; but in risk-off environments where USD strengthens, the euro becomes a victim of the broader dollar move. The recent bouts of USD strength and safe-haven flows have therefore weighed on EUR.

Stronger industrial production data from Germany and better-than-expected retail sales across southern Europe offered further support to the single currency, signaling that the bloc’s recovery may be stabilizing. Investors are also eyeing the potential boost from falling energy costs, as European gas prices retreated sharply following warmer weather forecasts and improved supply dynamics.

On the political front, sentiment has been buoyed by progress in EU budget negotiations and easing trade tensions with China. However, continued political fragmentation in France and Italy poses medium-term risks. The euro’s trajectory remains tied to relative monetary divergence with markets now pricing a narrower gap between the ECB and Fed’s easing cycles into next year.

Technical Analysis

EURUSD, H4:

EUR/USD has broken below its ascending channel pattern on the chart, confirming a shift from a medium-term bullish structure to a bearish bias. The pair is currently consolidating around the 1.1540 support area, which aligns with previous price congestion seen in early August. The breakdown below 1.1590 marked a key structural failure, suggesting sellers are regaining control.

Momentum indicators point to continued weakness. The RSI is hovering near 39, showing bearish momentum but not yet oversold, leaving room for further downside. The MACD remains below the signal line and zero axis, reinforcing the bearish tone with no signs of a bullish crossover yet.

If EUR/USD fails to recover above 1.1590, the next support is seen at 1.1470, while deeper losses could extend toward 1.1400. On the upside, a recovery above 1.1610 would be needed to neutralize immediate downside pressure and open the way toward 1.1710 resistance.

Resistance level: 1.1540, 1.1590

Support level:1.1470, 1.1400