EUR/USD fell for a third session and traded near 1.1600 during European hours on Wednesday. It stayed lower after February HCOB PMI releases from Germany and the Eurozone, with focus shifting to the US ISM Services PMI due later. Germany’s HCOB Services PMI rose to 53.5 in February from 52.4 in January, above the 53.4 forecast. Germany’s Composite PMI edged up to 53.2 from 53.1.

Eurozone Data And Market Reaction

The Eurozone HCOB Composite PMI increased to 51.9 in February from 51.3 in January. The Eurozone HCOB Services PMI rose to 51.9 from 51.6, indicating faster growth than at the start of the year. The pair weakened as the US Dollar held firm amid reduced expectations for near-term Federal Reserve rate cuts. Markets now mostly anticipate unchanged US rates until summer. Higher energy prices linked to Middle East tensions added to inflation concerns and supported the Dollar. The currency also gained from safe-haven demand as the conflict continued, alongside warnings from US President Donald Trump about possible shifts in Iran’s leadership. Looking back to this time in 2025, we saw the EUR/USD pair struggling near 1.1600 due to a strong US Dollar. Today, the situation has evolved, with the pair now trading significantly lower around 1.0850. The core dynamic has shifted from broad dollar strength to a clearer divergence in central bank policy expectations.

Policy Divergence And Trading Implications

Last year, the February 2025 HCOB PMI data for the Eurozone showed modest growth, with the composite index at 51.9. In contrast, the latest data shows the Eurozone composite PMI has weakened to 50.5, indicating a near-stagnant economy. With Eurozone inflation now down to 2.5%, this economic softness reinforces our view that the European Central Bank is positioned to cut interest rates sooner than its American counterpart. In early 2025, the market was scaling back bets on Federal Reserve rate cuts amid rising energy prices and inflation concerns. While US inflation has since cooled to a more manageable 2.8%, it remains stubbornly above the Fed’s 2% target. This persistent inflation continues to provide underlying support for the US Dollar, as the Fed maintains a more cautious stance on easing policy. This growing policy divergence between a dovish ECB and a hesitant Fed suggests continued downward pressure on EUR/USD. Traders should consider strategies that benefit from this trend, such as buying put options to hedge against or speculate on further declines. Implied volatility has also settled from the peaks seen during the height of the Middle East conflict in 2025, making options strategies more affordable. The key risk remains geopolitical instability, which continues to influence energy prices and safe-haven flows. A sharp escalation in global tensions could cause a sudden spike in oil, similar to the one we witnessed in late 2024, potentially scrambling central bank forecasts. This would likely strengthen the US Dollar further on safe-haven demand, accelerating the EUR/USD downtrend. Create your live VT Markets account and start trading now.

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