EUR/USD Slumps as US Dollar Gains Momentum Post EU-US Trade Agreement
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Euro Dips to Three-Week Low as Dollar Flexes Muscle
The euro slid to its weakest level against the US dollar in nearly three weeks on Monday, extending losses as markets digested the implications of a newly announced trade agreement between the European Union and the United States. By midday in London, the EUR/USD pair had fallen 0.6% to 1.0820, marking its steepest single-day decline since early June.
Trade Deal Triggers Greenback Rally
Currency traders swiftly repositioned after weekend announcements revealed breakthrough concessions on digital trade and agricultural tariffs. The accord—hailed as a détente in transatlantic tensions—appears to disproportionately benefit US exporters, particularly in the tech and pharmaceutical sectors. "This isn't just about tariff reductions," noted Clara Mendez, senior strategist at Banco Santander. "The fine print gives American firms clearer pathways to EU markets while maintaining certain protective measures stateside."
Market reactions amplified existing dollar strength, with the DXY index climbing 0.8% to 105.30. The greenback gained ground against all G10 peers, though the euro's drop stood out due to the currency bloc's direct involvement in the trade pact. Analysts observed unusually heavy options activity suggesting hedge funds were bracing for further euro weakness.
Diverging Central Bank Policies Add Pressure
While the trade deal served as an immediate catalyst, monetary policy divergence between the Federal Reserve and European Central Bank (ECB) deepened the euro's woes. Recent US inflation data has traders pricing in just one Fed rate cut this year, down from three projected in January. Meanwhile, ECB officials have openly discussed the possibility of back-to-back cuts starting September.
Technical Breakdown Signals More Pain Ahead
The EUR/USD's breach below its 50-day moving average at 1.0850 triggered algorithmic selling, with chart watchers flagging 1.0750 as the next critical support level. "We're seeing classic momentum chasing now," said David Kohler, head of FX trading at UBS Zurich. "Until the ECB demonstrates comparable hawkishness to the Fed, these dips could keep attracting sellers."
Interest rate differentials tell part of the story—the premium on two-year US Treasuries over German bunds widened to 190 basis points, its fattest margin since 2022. But some argue the trade deal's long-term implications matter more. The agreement includes provisions making it harder for EU regulators to target US tech giants with punitive digital taxes, removing a persistent overhang on dollar sentiment.
Geopolitical Ripples Beyond Currency Markets
The accord's strategic dimensions became clearer as Asian currencies also wobbled. China's offshore yuan fell 0.3%, reflecting concerns about Washington and Brussels presenting a united front on trade rules. "This isolates Beijing diplomatically while strengthening the dollar's reserve status," observed Mei Xiang, a former PBOC advisor now with the Peterson Institute.
What Comes Next for the Euro?
All eyes turn to Thursday's US GDP data and Friday's Eurozone inflation print. Another hot US number could push EUR/USD toward 1.0720—a level not seen since mid-April. But some contrarians see value emerging. "The trade balance still favors Europe," argued ING's Carsten Brzeski. "Once the knee-jerk reaction passes, structural factors may reassert themselves." For now, the market's verdict appears unequivocal: the dollar reigns supreme.
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