Euro-Dollar Extends Breakout
- Written by: Gary Howes
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The euro's strong week extends thanks to supportive yield spreads.
The euro to dollar exchange rate (EUR/USD) pushed 1.1652 earlier Wednesday, held aloft by supportive developments in bond markets.
Bond yields - the interest rate that government debt pays - have risen faster in the Eurozone than in the U.S. over recent days, which confers support to the euro.
Euro-dollar's test of 1.1652 delivers dollar buyers their strongest exchange rate since November 14.
"The euro has continued to strengthen gradually against the US dollar lifting EUR/USD to an intra-day high of 1.1653 overnight. After hitting a low of 1.1491 on 21st November, the pair has closed higher for seven consecutive days," says Lee Hardman, Senior Currency Analyst at MUFG Bank Ltd.
The rally takes it above the narrowing downward wedge pattern that has been evident on the charts since mid-September, when EUR/USD fell from its 2025 peak at 1.19.
We also note a break above the 50-day exponential moving average (EMA) at 1.1605, consistent with emerging positive momentum that would suggest the multi-week lows are in and a test of 1.19 in early 2026 becomes possible.
Eurozone bond yields rose Tuesday following an above-consensus inflation reading, which means markets are betting ECB interest rates will stay at current levels for an extended period of time.
"If eurozone inflation does not undershoot the ECB’s target in the coming months, as markets are positioned for, then seeing the 10Y swap rate break through 3% is suddenly not an unrealistic scenario," says Michiel Tukker, Senior European Rates Strategist at ING.
The 10-year swap is a key money market measure that reflects where investors and traders see future interest rates. It determines a swathe of products, such as mortgages and business lending products.
At the same time, EUR/USD gains reflect falling U.S. interest rate expectations as the past seven trading days have been characterised by a dovish repricing of Fed rate cut expectations.
The U.S. rate market has moved to almost fully price in a third consecutive 25bps rate cut from the Fed this month.
This is "weighing on the US dollar’s performance more broadly," says MUFG's Hardman.
"We expect the Fed to be more active in cutting rates going forward compared to the ECB supporting our forecasts for EUR/USD to move above the 1.2000-level in 2026," he adds.
