EUR/USD near two-week low: Dollar regains favour with markets

Market impact: Moderately bearish for EUR/USD in the short term, but vulnerable to sharp reversals.

The dollar’s renewed support reflects a repricing of Federal Reserve expectations after Chair Kevin Warsh adopted a hawkish stance at Jackson Hole. Markets are reportedly treating a September Fed rate hike as close to evenly balanced, increasing the relative yield appeal of U.S. assets and reducing the incentive to hold euros.

For EUR/USD, the key mechanism is the U.S.–euro-area interest-rate differential. If Treasury yields and Fed expectations continue rising while ECB tightening expectations remain comparatively stable, rallies in the pair are more likely to attract selling pressure. The move toward a two-week low therefore signals a shift from the pair’s earlier bullish momentum toward consolidation or a deeper corrective phase.

However, the bearish interpretation is not one-sided. Germany’s August inflation data accelerated, and hotter euro-area inflation could reinforce expectations that the ECB remains restrictive or potentially tightens further. That would limit downside in EUR/USD, particularly if U.S. labor-market data disappoints or pushes markets back toward Fed easing expectations.

What traders should monitor:

• U.S. August payrolls and labor-market details: This is the immediate catalyst. A strong report would validate the hawkish Fed repricing and could extend dollar gains; weak hiring or rising unemployment would undermine it.
• Eurozone inflation data: A hotter regional CPI reading could revive euro demand and challenge the dollar-led move.
• U.S. Treasury yields and rate futures: EUR/USD is likely to remain highly sensitive to changes in expected Fed policy rather than to the headline alone.
• Geopolitical risk: Renewed Middle East tensions can support the dollar through safe-haven demand, while also creating inflationary energy risks that may complicate both central banks’ policy outlooks.
• Price acceptance around the 1.1600 area: A sustained break below the recent trading zone would strengthen the case that the pullback is becoming more than a temporary correction. Conversely, recovery above that area, especially alongside falling U.S. yields, would suggest that dollar strength is losing momentum.

Overall, the immediate bias favors dollar strength and EUR/USD downside, but conviction should remain moderate because the market is entering a data-heavy week and German inflation provides a potential counterweight to the Fed-driven narrative.