The euro fell against the U.S. dollar on Friday after a fresh run of strong U.S. inflation data and escalating tensions in the Middle East, with the currency pair breaking below key technical support as traders braced for more volatility.
By late European morning trade, the euro had dropped through the 1.1630 level against the dollar, extending losses that began after a sharper-than-expected rise in U.S. inflation on Thursday. The move came as diplomatic talks over a fragile ceasefire stalled and the Strait of Hormuz remained closed, keeping pressure on energy markets and global risk sentiment.
U.S. inflation data fuels hawkish shift
The latest data out of the United States reinforced expectations that the Federal Reserve may delay or even reverse its recent easing cycle.
- The Personal Consumption Expenditures Price Index, released late Thursday, rose 0.5% month-on-month, above the 0.3% consensus and marking the fastest increase in core PCE in more than a year.
- On Friday, the March Consumer Price Index showed a 3.8% year-on-year increase, also above forecasts of 3.6%.
The stronger readings followed minutes from the Fed’s March policy meeting, which had already hinted at a more hawkish tone. For the first time since rate cuts began in August 2024, some policymakers openly discussed the possibility of revisiting monetary tightening if inflation failed to ease toward the 2% target.
The inflation surprise pushed the yield on the 10-year U.S. Treasury note up 12 basis points to 4.52%, strengthening the dollar and weighing on risk-sensitive assets. Brent crude futures climbed above $94 per barrel, their highest close in 18 months, as energy markets reacted to renewed supply concerns.
Euro under pressure despite muted European data reaction
Earlier in the week, the euro had held near 1.1660 after pulling back from a one‑month high of 1.1721. Initial market reaction to European data had been relatively contained.
Germany’s latest figures showed:
- February industrial production down 0.3%, defying expectations of a 0.9% rise and following a revised 0.5% decline in January.
- A trade surplus of €19.8 billion, slightly above forecasts of €18.5 billion but below January’s €21.2 billion.
Despite the softer industrial numbers, both exports and imports grew faster than expected, easing some concerns over a deeper manufacturing slowdown. The euro’s limited initial response reflected the dominance of global macro factors and U.S. policy expectations over regional data.
European Central Bank Executive Board member Isabel Schnabel acknowledged the weakness in German industry on Friday, stressing that the ECB governing council must stay data‑dependent and alert to signs of a manufacturing downturn. Her remarks underlined the growing divergence between a softening European economy and a still-inflationary U.S. backdrop.
Geopolitical tensions and oil disruption add to volatility
The currency and bond market moves unfolded against a backdrop of rising geopolitical risk.
Reports earlier in the week indicated that Tehran had temporarily closed the Strait of Hormuz following air strikes on Lebanon, throwing a ceasefire deal in the region into doubt. Iranian authorities accused other nations of violating the truce, while the United States and Israel maintained that Lebanon was never part of the agreement.
Washington confirmed that delegations from the parties involved would meet in Pakistan to continue talks. However, sources familiar with the negotiations said on Friday that the discussions had stalled without a breakthrough, leaving the key shipping lane shut for now and reinforcing upward pressure on oil prices.
The closure of one of the world’s most critical energy chokepoints has amplified risk-off sentiment and raised concerns that higher energy costs could filter into broader inflation, especially in the United States where price pressures are already re-accelerating.
Technical picture: key levels give way
From a technical standpoint, the euro initially managed to hold most of its previous gains, with the four‑hour Relative Strength Index remaining in positive territory and providing some support.
Key levels identified earlier in the week included:
- Resistance: 1.1721–1.1740, marking the recent one‑month high and an upper resistance zone.
- Support: 1.1630–1.1640, above last week’s low near 1.1505.
Once the stronger‑than‑expected PCE data hit on Thursday, the pair slipped through the 1.1630 support area, triggering further downside momentum into the next session. The break signaled a loss of near‑term bullish traction and highlighted the sensitivity of the euro to incoming U.S. macro data amid a shifting rate narrative.
Conflicting forces keep direction unclear
The market now sits at the intersection of two powerful, and partly opposing, forces:
- Geopolitical stress and the closure of the Strait of Hormuz are fostering a risk-off mood that typically benefits the dollar as a traditional safe haven, while also pushing up energy prices.
- Rising inflation pressures are prompting the Fed to lean more hawkish, reinforcing dollar strength and increasing the cost of capital globally.
For traders, this combination is compressing directional clarity. Currency moves are increasingly driven by headlines from the Middle East alongside key data releases from Washington, creating a backdrop of elevated volatility where short-term positioning can shift rapidly on new information.
With U.S. inflation re-accelerating and diplomatic efforts over the ceasefire showing little progress, the balance of risks remains tilted toward further dollar strength and sustained pressure on the euro, at least in the near term.
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