Euro Surrenders Early Gains as US Dollar Rebounds

A recovering US Dollar pushes the Euro back towards 1.1213.
The US Dollar’s rebound appears to have drawn support from rising oil prices.
Other Eurozone nations face spillover from France’s fiscal risks.

A sharp recovery in the US Dollar (USD), fuelled by a further rise in oil prices, erases the Euro’s (EUR) early advance during Tuesday’s European trading session. The major currency pair retreats to trade broadly flat around 1.1213.

Despite recovering from an intraday low of 101.74 to around 101.91 in European trading, the US Dollar Index (DXY) remains 0.13% lower. The index measures the Greenback against a basket of six major currencies.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

A 2.15% surge takes WTI Oil to nearly $100.20, its highest price in over a month. Continuing conflict in the Middle East has lifted the risk premium in oil prices, with Iran threatening to expand its blockade to other sea routes.

By pushing global inflation expectations away from their anchors, rising oil prices increase the likelihood that central banks will raise interest rates.

Concerns surrounding Artificial Intelligence (AI)-related optimism weighed on the US Dollar’s performance over the past week.

In their assessment of US financial markets, MUFG analysts describe them as “a major beneficiary of strong foreign investor demand driven by AI-related optimism.” According to the analysts, foreign investors bought “USD942 billion of US equities in the twelve months to July, while purchases of US corporate bonds increased sharply to USD452 billion over the same period.” For MUFG, these “sizeable inflows highlight how the USD has become increasingly tied to investors’ search for higher returns in US financial markets, rather than benefiting from its traditional safe-haven status.” Their caution, however, is that “this dynamic also leaves the USD more exposed to a reversal if sentiment towards AI deteriorates.”

The Euro’s appeal has also weakened as fiscal turmoil in France spills over into other Eurozone countries.

Deutsche Bank analysts trace the impact of the latest French political turmoil across European markets, observing that “those market concerns around French debt cascaded across other countries and asset classes too.” Illustrating the spillover, they note that “the Italian 10yr spread over bunds was also up +4.7bps on the day to 111bps, whilst Spain’s was up +1.2bps to 62bps.”

EUR/USD Technical Analysis: Can the Pair Overcome Its Bearish Bias?

Trading at 1.1219 on the daily chart, EUR/USD retains a bearish near-term bias below its 20-period exponential moving average (EMA) of 1.1273. Failure to regain this short-term EMA indicates that overhead supply continues to limit rallies. Meanwhile, the Relative Strength Index (14), at 38.5, remains under the neutral 50 mark, pointing to persistent downward pressure rather than a convincing recovery.

For the bearish bias to ease and a more durable rebound to become possible, EUR/USD must first clear immediate resistance at the 20-period EMA of 1.1273. Until the pair regains that level, moves towards the EMA are likely to attract fresh selling. With no nearby technical support visible on the chart, a return of seller control would leave the pair exposed to further declines.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

US Dollar: Frequently Asked Questions

What Role Does the US Dollar Play?

Alongside its status as the official currency of the United States of America, the US Dollar (USD) serves as the ‘de facto’ currency in a significant number of other countries, circulating alongside their local banknotes. No currency is traded more widely: according to 2022 data, it represents over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion. After the Second World War, the USD replaced the British Pound as the world’s reserve currency. Gold backed the US Dollar for most of its history, until the Bretton Woods Agreement in 1971 brought the Gold Standard to an end.

Why Do Federal Reserve Decisions Affect the US Dollar?

Monetary policy set by the Federal Reserve (Fed) is the single biggest influence on the US Dollar’s value. The Fed uses interest rate adjustments as its main means of meeting two mandates: maintaining price stability by controlling inflation, and promoting full employment. Inflation above the Fed’s 2% target, accompanied by excessively rapid price increases, prompts rate hikes that support the USD. Conversely, the Fed may cut interest rates if inflation drops below 2% or the Unemployment Rate is too high, putting pressure on the Greenback.

How Does Quantitative Easing Work, and What Does It Mean for the US Dollar?

Printing additional Dollars and introducing quantitative easing (QE) are options available to the Federal Reserve in extreme circumstances. Through QE, the Fed substantially expands the supply of credit to a financial system that has become stuck. This unconventional policy is used when credit dries up because banks, fearing counterparty default, refuse to lend to one another. It is a last resort when interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, the Fed chose QE to tackle the credit crunch. Under this process, it prints more Dollars to purchase US government bonds, mainly from financial institutions. The usual effect of QE is a weaker US Dollar.

How Does Quantitative Tightening Work, and What Does It Mean for the US Dollar?

Usually supportive of the US Dollar, quantitative tightening (QT) reverses the easing process. The Federal Reserve ceases bond purchases from financial institutions and, as bonds in its portfolio mature, does not reinvest the principal in further purchases.