EUR/USD has dipped from a peak of 1.1140 but continues to attract attention. Factors supporting the euro include its status as a liquid alternative to the dollar and a 3% current account surplus.
However, the eurozone’s trade-driven economy presents challenges. This week, European trade leaders are meeting to discuss potential responses to trade tensions, with cautious measures expected in contrast to China’s steep tariffs.
The Chinese Currency Situation
The People’s Bank of China fixed USD/CNY slightly higher, potentially indicating that a rate above 7.20 could suggest a devaluation of the renminbi. For EUR/USD, swap differentials have narrowed, maintaining support around 1.09. Notably, 1.11/12 remains a strong resistance level, requiring adverse US news for a potential breach.
Taking into account the recent movements in EUR/USD, we have observed a pullback from 1.1140, suggesting that while bullish momentum has faded somewhat, underlying factors remain in place to keep the pair from falling sharply. The euro continues to offer appeal as a liquid substitute when dollar sentiment weakens, and the eurozone’s consistent current account surplus—hovering near 3% of GDP—anchors confidence for now.
That said, this surplus comes from strong export performance, which leaves the bloc exposed when global trade dynamics shift. With Europe’s economic structure relying heavily on external demand, upcoming trade talks—driven largely by the region’s policymakers—could set the tone for how regional export strategies adjust. We expect the measures to be measured rather than aggressive, particularly when compared with Beijing’s recent action.
In contrast, attention has turned towards moves by the People’s Bank of China, which adjusted its daily USD/CNY fix marginally upward. For those of us watching closely, that doesn’t go unnoticed. A trend towards a weaker renminbi could gather pace should spot rates climb consistently above 7.20. At that threshold, Beijing would be seen by many as quietly tolerating depreciation—fast becoming a tool in response to external pressures.
Eurozone And US Data Watch
This casts a different light on the euro’s performance. Eurozone exporters may gain an edge if Asian currencies continue to come off, especially since the common currency remains broadly stable. From the perspective of rate differentials, we’ve tracked a firm narrowing in EUR/USD swap spreads, which is often a temporary floor when dollar demand weakens. This technical floor has formed near 1.0900, with positioning and flows also aligning at this level.
What’s more, to retest the 1.11–1.12 range, we’d need a renewed break in US data trends. In essence, dollar softness isn’t enough—it has to be coupled with either weaker US inflation prints, dovish guidance, or a sharp deterioration in labour data. Otherwise, selling into rallies above 1.1050 becomes the skewed play. There’s still a sense that any move toward 1.12, absent a US-side catalyst, runs into firm resistance, including legacy offers and options-related barriers.
On the volatility side, implieds have relaxed, but not collapsed. That suggests two-way risk is still being priced. If the euro is used again as a carry-neutral hedge—something that’s happened in recent months—there may be shallow demand on dips. But expectations must be calibrated; no breakout is likely to sustain without dislodging embedded dollar strength.
Watching rate expectations closely will help. The FOMC pricing continues to shape dollar short-term direction, and we believe that any change here—especially if the market trims expectations on cuts—could cap euro upside. We need to remain attentive to how spreads respond; Eurozone macro updates do matter, yet right now it’s US policy that largely decides the ceiling.
As for positioning, the speculative community remains long but not excessively so. That removes some crowding risk but doesn’t eliminate downside exposure if defensive flows overwhelm next week. The near-term bias looks consolidation-heavy, possibly with a mild downward tilt until momentum inputs shift. Keep an eye on any policy-related surprises or outsized data variance—we’ve seen how quickly shifts can feed directly into spot moves, even in lower-volatility regimes.
