The Euro rebounded mainly due to USD weakness, after soft US jobs and sentiment data triggered a broad Dollar sell-off. The ECB remains steady, in no hurry to cut rates, while Eurozone data is stable, supporting a gradual recovery. With US momentum cooling and the Fed moving closer to easing, rate differentials should narrow, favoring EUR upside.

EUR: Bullish

The Euro moved mostly in response to the US Dollar’s volatility, ending the week stronger but only after hitting multi month lows. EUR/USD began the week under pressure, falling from above 1.1600 to 1.1468 as strong US data lifted the DXY past 100.00. With the European Central Bank maintaining a neutral stance and Eurozone data mixed, the Euro had little independent support early in the week. Sentiment shifted sharply later when weak US labor market figures and a poor University of Michigan consumer sentiment report triggered a broad dollar sell off. The Euro recovered to around 1.1575, driven almost entirely by the reversal in the US outlook rather than any change in Eurozone fundamentals.

ECB officials maintained a patient, data dependent tone. Policymakers including Kocher, Nagel, and Kazimir said rates are in a “good place,” signaling no rush to adjust policy. De Guindos expressed mild optimism on growth, but the central message was one of waiting for clearer data. Attention now turns to the December ECB meeting, which will include updated staff projections and may determine the next policy steps. Schnabel mentioned the possibility of adjusting the ECB’s portfolio towards shorter maturities, though this had little market impact.

Economic data across the Eurozone remained mixed. Final October PMI readings showed manufacturing holding steady at 50.0 and services revised up slightly to 53.0, suggesting resilience in some sectors but still subdued demand overall. Construction PMIs declined, highlighting ongoing weakness. German data was inconsistent, with industrial orders rising 1.1% and exports showing strength despite a weaker trade balance, while industrial output missed forecasts at +1.3%, reflecting persistent sluggishness in production. Eurozone producer prices fell by 0.2% year on year in September, undershooting expectations and confirming soft inflation. The ECB’s wage tracker for 2025 held steady at 3.158%, showing that wage growth has not yet cooled meaningfully.

On the geopolitical side, the EU and China held constructive talks on export controls and rare earths, agreeing to maintain dialogue to strengthen supply chains. In France, discussions continued over the government’s proposed wealth tax following its initial failure to pass, though the issue had limited impact on the Euro. The European Commission also opened an antitrust investigation into Deutsche Boerse and Nasdaq, a market specific event with no major macroeconomic implications.

The Euro traded with wide swings last week, ending stronger after reversing earlier losses driven by the Dollar’s volatility. It fell early in the week as firm US data lifted the Dollar, then recovered when weak US labor and sentiment reports triggered broad Dollar selling. Within Europe, the ECB’s tone stayed consistent and data remained broadly solid, pointing to steady activity rather than stagnation. The overall backdrop remains one of stabilization and mild resilience.

Near term, weak bullish. The Euro has regained footing after testing multi month lows, with the domestic outlook holding firm and providing a more stable base. The ECB continues to describe policy as “in a good place,” and incoming data show moderate but persistent growth momentum, while inflation pressures are softening in an orderly way. The Dollar’s rate premium appears fully priced, and softer US data have started to unwind some of that advantage. If upcoming CPI and retail releases confirm cooling momentum in the US, the Euro should extend modest gains. A renewed rise in US yields or hawkish Fed commentary would limit the upside but not reverse the broader tone.

Longer term, weak bullish. The Euro’s fundamentals remain sound. The ECB is set to ease later than the Fed once the global cycle turns, and Eurozone fiscal conditions in France and Italy remain manageable. The region’s external balance and trade position are improving as global manufacturing stabilizes. As the US policy edge erodes and relative yields narrow, capital should gradually rotate back toward Europe. The adjustment will be slow and data driven, but the direction remains gently upward.

If the narrative flips, for instance if the ECB signals earlier easing, sovereign spreads widen sharply, or US yields rebound on stronger data, we would reconsider and lean toward a weaker Euro until the data and market pricing improve.

USD: Short at rally

The US Dollar experienced sharp swings during a volatile week as optimism over US economic strength quickly faded after several weak data releases. The DXY started the week strong, breaking above 100.00, supported by a solid ADP employment report and a stronger-than-expected ISM Services PMI, where the Prices Paid index surged to a three-year high, reinforcing expectations of a hawkish Federal Reserve. However, this momentum reversed sharply on Thursday after weak labor market proxies, including a surge in Challenger job cuts, led to renewed concerns about the economy. The sell-off accelerated Friday after a poor University of Michigan consumer sentiment report showed confidence plunging to 50.3, its lowest in years, due to the ongoing government shutdown, while inflation expectations climbed higher. This stagflationary combination sent the dollar to a weekly low near 99.40, erasing earlier gains and shifting sentiment from US strength to recession fears.

Mid-week data briefly supported the dollar as the ADP report showed a 42,000 job increase versus expectations of 28,000, a clear rebound from the previous month’s loss. The ISM Services PMI rose to 52.4, well above expectations, while the Prices Paid index jumped to 70.0, signaling persistent inflation pressures. However, Thursday’s reports painted a much weaker picture. Challenger Job Cuts surged 175.3% month-on-month to 153,000, RevelioLabs’ employment estimate showed a 9,100 job loss, and the Chicago Fed’s unemployment estimate climbed to 4.36%. Friday’s University of Michigan survey confirmed the downturn with sentiment dropping sharply and inflation expectations rising to 4.7%. Earlier in the week, the ISM Manufacturing PMI had also missed expectations at 48.7, but it was initially ignored as markets focused on the stronger services data.

Federal Reserve officials maintained a cautious tone as the government shutdown delayed key data releases. Goolsbee said the Fed should slow down its actions when visibility is poor, while Vice Chair Jefferson noted growing downside risks to employment. In contrast, Hammack argued that policy was barely restrictive and voiced concern about persistent inflation, particularly after the hot ISM Services Prices Paid data. Despite the volatility, market expectations for a December rate cut remained stable within a 16–17 basis point range. The dollar’s decline reflected fears of a broader slowdown rather than expectations for earlier cuts. The government shutdown remained unresolved, with a Democratic proposal to end it rejected late Friday, extending uncertainty.

Trade and geopolitical developments added further tension. The US and China clashed over AI chip sales after the White House blocked NVIDIA from selling modified chips to China, while Beijing ordered domestic AI chip use in state-funded projects. The Supreme Court also began reviewing the legality of tariffs imposed by the previous administration. Some minor signs of easing appeared, such as China’s purchase of US wheat and the suspension of certain rare earth export controls.

Market sentiment shifted dramatically through the week. Early optimism around US economic resilience gave way to fears of stagflation and recession. Weak labor data and the collapse in consumer confidence triggered a broad risk-off move, hitting both the dollar and equities. Additional pressure came from concerns over inflated valuations in AI stocks, especially after Palantir’s drop despite strong earnings and NVIDIA’s warning that China could outpace the US in AI development. The prolonged government shutdown further undermined sentiment and reinforced the perception of rising economic risk.

The Dollar held most of last week’s gains as the market stayed with the idea that the Fed’s cut was an insurance move and not the start of fast easing. Front end US yields stayed supported, rate differentials versus peers remained wider, and that kept the Dollar bid even while global risk sentiment stayed constructive. Inflation expectations moved higher, so the market is still willing to price some inflation risk even though parts of the realised data have been steadier.

Near term, neutral with a bearish tilt. The domestic driver is still the post Fed repricing toward a pause, but that is now largely in the price. That means upside needs a clear confirmation from CPI, retail sales or Fed communication, while downside only needs data to underwhelm. If CPI comes in softer or activity shows loss of momentum, markets can quickly rebuild December cut odds and shave off the recent policy premium, pushing the Dollar lower against the basket. External conditions are not providing a strong haven bid at the moment, so a small disappointment on US data has a better chance of showing up in the Dollar than an equivalent upside surprise. If inflation data match the rise in expectations and front end yields push up again, the neutral call can hold at current levels.

Longer term, weak bearish. The Fed is still closer to easing than several peers and the committee is already split which is typical for late cycle risk management. US growth is still respectable but the mix of softer housing, uneven business investment and fiscal noise points to slower momentum into year end. As the global backdrop steadies and other central banks close some of the rate gap, relative yield support for the Dollar should erode and the currency should underperform gradually. The Dollar will still find support on episodes of global stress or a sudden tightening in credit, so the path lower will not be straight.

If the narrative flips and the Fed is pushed by data or its own communication back toward a December cut, or if front end yields fall as markets rebuild a more aggressive easing path, we will reconsider and lean toward a weaker Dollar until the data and market pricing improve. A stronger global risk tone with better PMIs abroad and narrower US rate differentials would have the same effect.