EUR/USD Tumbles Amid Widening Rate Differentials and Energy Shock
The EUR/USD pair has been under pressure in recent weeks, and this trend continues into the final week of September. The pair is currently trading at 1.1377, down 0.13% from the previous session.
This decline can be attributed to the widening rate differentials between the Federal Reserve and the European Central Bank (ECB). The Fed raised interest rates by 25 basis points on September 16, taking its target range to 3.75-4.00%, while the ECB increased its three key rates by 25 basis points on September 10, but at a slower pace.
The policy gap between the two central banks has grown to 150 basis points, with the Fed's aggressive tightening cycle pushing up US Treasury yields. The 10-year Treasury yield is currently at 5.22%, while Germany's 10-year Bund is trading at 3.624%. This spread of 160 basis points in favor of dollar assets pulls capital into the US.
The energy shock triggered by President Trump's rejection of Iran's proposal to reopen the Strait of Hormuz has also contributed to the decline in EUR/USD. The eurozone is a net energy importer, and every increase in oil prices widens its trade deficit and drains euros from the region.