Widening Policy Divergence Between the US and Europe

Jason

Forex

Summary:

EUR/USD is exhibiting a weak consolidation pattern against a backdrop of escalating fundamental divergence.

BUY EURUSD

EXP

PENDING

1.15437

Entry Price

1.16357

1.14937

1.15533 -0.00439 -0.38%

Pips

PENDING

1.14937

Exit Price

1.15437

Entry Price

1.16357

Fundamental Analysis

EUR/USD is consolidating weakly amid worsening fundamental divergence, primarily driven by last Friday's US CPI data. The US August core CPI rose 0.3% MoM, slightly above the previous reading of 0.2%, while headline CPI hit 0.4% MoM, substantially exceeding market expectations. This elevated inflation data has further boosted market bets on Fed tightening, with the CME FedWatch tool indicating that the probability of a 25-basis-point rate hike in September has climbed into the 87%–90% range. Robust inflation figures provided short-term support for the US Dollar Index, and despite a subsequent pullback dragged down by a surging Japanese yen, the dollar remains relatively firm overall.

By contrast, although the eurozone faces energy price volatility and lingering inflation pressure driven by escalating Middle East conflicts—which has fueled ECB rate hike expectations—its economic recovery remains fragile. Germany, the eurozone's economic engine, reported factory orders growing beyond expectations for a third consecutive month in July. However, this growth was primarily driven by large public defense and infrastructure procurements; excluding these large orders, underlying demand remains weak, with automotive exports declining noticeably—highlighting sluggish domestic demand and structural headwinds. Furthermore, weak retail sales across the eurozone reflect constrained consumer spending, capping potential upside for the euro.

Currently, monetary policy paths in the US and Europe are diverging sharply: the Fed maintains a hawkish stance due to sticky inflation and may tighten further, whereas the ECB, despite its intent to raise rates to curb imported inflation, finds its policy space constrained by sluggish economic growth. This fundamental "scissors gap" deprives the euro of sustained upward momentum. In the short term, EUR/USD is highly likely to range-trade within lower levels.

Technical Analysis

On the 4-hour chart, EUR/USD is currently trading within a downward regression channel. Having accelerated lower after breaking below the 0.236 Fibonacci retracement level (around 1.1572), price is currently testing the support zone between the channel's middle and lower rails, showing signs of stabilizing near the channel bottom. Key downside support lies in the 1.1500–1.1533 region, where the lower channel rail converges with a previous platform high. A breakdown below this level would trigger a new wave of decline toward 1.14208 (the level 0 baseline marked on the chart). Key upside resistance is located at 1.15724 (0.236 Fibonacci retracement level), which acts as a resistance zone for a potential pullback retest following the breakdown. EUR/USD has broken cleanly below the Ichimoku cloud and the middle channel rail; however, whether it can establish a firm footing above the lower channel rail to initiate a rebound remains to be further observed.

In terms of technical indicators, within the Ichimoku system, the Tenkan-sen (red line, 1.16025) and Kijun-sen (blue line, 1.15933) formed a high-level bearish dead cross and are pointing sharply downward. Meanwhile, the current price (1.15559) is trading far below the cloud, indicating strong bearish momentum for EUR/USD.

Regarding the ADX indicator, the ADX line (green line, 39.10) shows a rapid upward rise, with +DI and -DI diverging sharply. The -DI (blue line) sits above at 41.92, far higher than the +DI (red line, 7.93), demonstrating that the bearish trend is exceptionally strong following the breakdown of key support. Although the rapid decline in price suggests a potential short-term technical bounce, given the overwhelming seller dominance and rapid downward momentum, EUR/USD may further probe lower toward the lower channel rail before initiating a technical rally. Widening Policy Divergence Between the US and Europe_1

Widening Policy Divergence Between the US and Europe_1

Trading Recommendations

Direction: Buy / Long

Entry: 1.15437

Target: 1.16357

Stop Loss: 1.14937

Support Levels: 1.15511, 1.15337, 1.15055

Resistance Levels: 1.15724, 1.15933, 1.16184

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Risk Disclosure

The risk of loss in trading financial instruments such as stocks, FX, commodities, futures, bonds, ETFs and crypto can be substantial. You may sustain a total loss of the funds that you deposit with your broker. Therefore, you should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.

No decision to invest should be made without thoroughly conducting due diligence by yourself or consulting with your financial advisors. Our web content might not suit you since we don't know your financial conditions and investment needs. Our financial information might have latency or contain inaccuracy, so you should be fully responsible for any of your trading and investment decisions. The company will not be responsible for your capital loss.

Without getting permission from the website, you are not allowed to copy the website's graphics, texts, or trademarks. Intellectual property rights in the content or data incorporated into this website belong to its providers and exchange merchants.

Recent Searches

Top Searches

Markets

Analysis

User

24/7

Economic Calendar

Education

Data