EUR/USD Breaks Downtrend as ECB Rate Bets Strengthen Amid Positive European Data

The EUR/USD currency pair broke its downtrend as ECB rate bets strengthened. On Friday, it traded at 1.1501, down 0.23% from the previous session but holding above the 1.15 handle and near its highest level since June 16. This month, the pair is on track for a gain of around 0.8% to 1.09%, its best performance since the euro broke through in the spring.

The week's path explains everything about where the pair sits. Going into Wednesday's Fed decision, EUR/USD was pinned near 1.1386 with the dollar sitting at a one-month high on safe-haven flows out of the Middle East conflict. Markets had assigned roughly a one-in-three chance to a surprise Fed hike, but the committee held and three regional presidents dissented in favor of a hike.

Then the European data landed. Second-quarter eurozone GDP came in at 0.4% quarter over quarter against a 0.2% forecast. German inflation rose more sharply than expected. EUR/USD climbed aggressively through 1.1500, cleared the mid-July top, and printed a new higher swing high, the first genuine structural break in the downtrend since January.

The macro divergence driving this is unusual. Both central banks are now leaning toward tightening rather than easing, which is not a configuration currency markets see often. The ECB holds its deposit rate at 2.25% after hiking on June 11 for the first time since 2023, with markets pricing 70% to 79% odds of a September 10 increase to 2.50% and fully pricing 2.75% by early 2027.