EUR/USD Slide Driven by Widening Rate Gap Between US and Europe

The EUR/USD pair has been sliding for three consecutive sessions and reached its lowest level since July 28 at 1.1375 to 1.1385 on Thursday. The euro has lost 2.53% against the dollar over the past month, and on a 12-month basis, it is down 2.42%. This decline is driven by the widening rate gap between the US and Europe, with the Fed's target range sitting at 3.75% to 4.00%, while the ECB's deposit rate stands at 2.50%. The current scenario favors a further decline in EUR/USD as long as U.S. yields keep climbing.

The strength of European data has been unable to hold up the euro, and the pair's short-term momentum has reached an extreme level with a daily Relative Strength Index reading of 25.47, deep in oversold territory. The core of the EUR/USD story is the distance between two policy rates, which leaves a gap of 125 to 150 basis points in favor of the dollar at the front end.

The U.S. bond market has been the driving force behind this decline, with the 10-year yield jumping 15 basis points on Wednesday alone and extending to 5.15% on Thursday. This move widened the transatlantic 10-year spread by more than European bond markets could offset, attracting capital flows from around the world.