20.08.202600:42 Forex Analysis & Reviews: The Dollar Gives Way to the Euro

Money flows like water: it always finds a breach and escapes to where it is calmer and more profitable. This is how capital has been shifting from North America to Europe in recent weeks, with the EUR/USD pair attempting to consolidate above 1.160, reflecting this flow.

Formally, the rally is based on the divergence in monetary policy between the European Central Bank and the Federal Reserve. However, behind this attractive macro picture hides a much more down-to-earth story: investors are simply voting with their money for what seems more reliable. European stock indices are confidently outperforming their U.S. counterparts. According to a Bank of America survey, about 47% of fund managers expect European stocks to outperform American stocks over the next year—the highest level since February, when the market was still operating without fear of war with Iran.

Economic Surprise Dynamics in the U.S. and Europe

However, the matter now lies less with the strength of the euro and more with the dollar's fatigue. The eurozone economy is demonstrating unexpected resilience: 97% of participants in the same survey do not expect a recession—the highest share since 2007. Three-quarters are confident that further stock growth will be supported not by revaluation but by actual corporate profits. The Citigroup index shows a sharp contrast in dynamics: regional data is exceeding forecasts more than at any point since February 2023, while American data—retail sales and employment—have recently faltered.

Euro Stoxx 600 reached record highs after the best earnings season in nearly four years and is trading at a forward multiplier of 15, narrowing the discount to the S&P 500 to its lowest level since February 2022. In reality, the matter is not only about price. As traders note, the market is transitioning from the narrative of "cheap because it's cheap" to one centered on quality earnings—a much more compelling argument for buying than a mere discount.

Nevertheless, in August, Euro Stoxx 600 lagged behind the S&P 500 by nearly 3 percentage points, breaking a two-month streak of outperformance. More than half of managers expect the ECB to raise rates in 2026 and 2027, but history suggests that stocks can continue to rise even with policy tightening, as long as the economy can sustain profit growth.

Dynamics of Euro Stoxx 600 and ECB Rates

The key event of the week for EUR/USD will be the minutes from the July FOMC meeting. Morgan Stanley will be looking at the depth of the split within the Committee, sensitivity to the soft June data on inflation and employment, and any hints regarding the revision of the number of meetings. The minutes may reveal much about the Fed's future reaction function—the very set of rules by which the market tries to guess the central bank's next step.

Meanwhile, the euro behaves like someone who has finally had a good night's sleep: not euphoria, but calm confidence. Whether this calm will remain after the minutes are published is an open question.

Technically, on the daily chart, EUR/USD is storming the upper boundary of the fair value range of 1.140-1.160. Success here will allow for the buildup of longs formed from 1.154.