The rapid rise in PMI, Treasury yields, and expectations of further Fed monetary tightening have strengthened the case for EUR/USD bears. At the same time, Europe continues to face significant political and energy-related challenges. Let’s examine the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The US PMI is at a 5-year high.
- There is a 70% chance the Fed will raise rates in October.
- Europe is preparing for an energy crisis.
- Short trades can be opened with targets of 1.13 and 1.12.
Weekly Fundamental Forecast for Dollar
The stronger the economy, the higher the interest rates it can withstand. Against this backdrop, the surge in US PMI to its highest level since 2021, combined with increasingly hawkish rhetoric from FOMC officials, has raised the probability of the Fed continuing its monetary tightening cycle in October to 70%. This has also triggered the fastest rise in Treasury bond yields since April 2025. As a result, the EUR/USD was on track to reach its first bearish target of 1.14, with 1.13 in sight.
US Composite PMI
Source: Bloomberg.
Input costs for US businesses surged in September at their fastest pace in four years. At the same time, fuel and transportation costs rose amid higher crude oil and petroleum product prices throughout the month. These developments are likely to intensify pressure on selling prices and add to inflationary pressures in the months ahead.
Donald Trump’s decision to restrict diesel fuel exports ahead of the US midterm elections may seem like a logical attempt to appease voters dissatisfied with the administration. However, such measures can lower domestic prices only temporarily. For global markets, reduced supply is a bullish factor—and Europe is likely to bear the brunt of the US administration’s decision.
Europe is already facing reduced supplies from Russia and the Middle East, and the latest US restrictions could further tighten the market. Diesel prices have risen 135% since the start of the year, while low gas storage levels are drawing comparisons with the 2022 energy crisis, which pushed the euro below parity against the US dollar.
The situation is further complicated by the deepening political crisis in France, which is increasing concerns about potential ECB intervention in the eurozone debt market. Against this backdrop, the EUR/USD pair continues to plummet. Neither the rise in European PMI to a three-year high nor the OECD’s upward revisions to GDP growth forecasts for the eurozone and its individual economies have been enough to reverse the pair’s decline.
Euro Area GDP Growth
Source: Bloomberg.
The US economy appears stronger, interest rates are higher, and the Fed’s decision to begin a cycle of monetary tightening in September—which had seemed controversial—is now viewed by the markets as the right move. At the same time, strong PMI figures, hawkish comments from FOMC officials, and Kevin Warsh’s reassurances about the US administration’s influence on the central bank are driving a rapid strengthening of the US dollar. With all the problems plaguing the regional currency, how can the euro possibly compete with it?
Weekly Trading Plan for EUR/USD
The EUR/USD pair easily reached the first of the two previously identified targets for short trades at 1.14, with 1.13 remaining as the next target. Meanwhile, the looming political and energy crises could intensify downward pressure on the euro, potentially pushing the price toward 1.12. In this connection, consider opening short positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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