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Faster, higher, stronger! EUR/USD is plunging because the Federal Reserve is expected to tighten monetary policy faster than the European Central Bank. Treasury yields are higher than their German counterparts. The US economy looks stronger than Europe's. These factors, together with rising political risks in Germany and France and the specter of an energy crisis like 2022, leave the euro no chance against the dollar. How long will the regional currency be pummeled?
After business activity data and hawkish rhetoric from FOMC officials, the chances of a federal funds rate hike in October jumped from 55% to 70%. The probability of ECB tightening in the same month is 51%. This reflects a faster pace of Fed monetary tightening. Derivatives markets expect borrowing costs to rise to 4.75% at the end of the cycle.
Rallying yields on 10-year US Treasuries to levels not seen since 2007, and 30-year yields to peaks not seen since 2004, indicate US assets are more attractive than European ones. Notably, Kevin Warsh contributed to this. Fed rate hikes removed one of the main constraints on buying the dollar — fears that the central bank would bow to White House pressure and alter policy. That reversed part of the risk premium priced into the greenback after the Treasury's bond-buyback announcement in August.
Greater attractiveness of US assets versus European ones means capital flowing from the EU to the US, which becomes a tailwind for EUR/USD bears.
Despite eurozone business activity jumping to a three-year high, US purchasing managers' indices rose to five-year highs. The United States looks stronger than the eurozone, and according to basic principles of fundamental analysis, a strong economy supports a strong currency. The firmer GDP stands, the higher the central bank can lift rates. This is a strong argument for continuing the EUR/USD decline.
Finally, the US does not face problems Europe does. Heads of government in Germany and France may be forced out, triggering capital flight and pressure on the euro. Moreover, rising oil, gas and refined-product prices echo the 2022 energy crisis, when EUR/USD fell below parity.
Thus, the US dollar outperforms the euro on many parameters, supporting the sustainability of the downtrend in the major currency pair.
Technically, on the daily chart, the first of the two previously indicated short targets at 1.14 and 1.13 has been reached. As long as the euro trades below $1.14, the emphasis should remain on selling.
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