ING reports that a bond market sell-off and higher long-dated yields are weighing on the euro against the US dollar. It also links elevated energy prices to weaker Eurozone growth, which can pressure the euro.
The note says China’s April activity data was “uniformly bad”, adding to concerns about global growth. It adds that higher energy costs and rising long-term rates act as a headwind for the Eurozone economy.
It states the European Central Bank may keep a hawkish tone to avoid losing control of long-end bond yields. It also notes that money markets have priced in 75bp of ECB tightening this year.
The update points to May flash PMI surveys, with the composite reading expected to drift further into contractionary territory. It also references several ECB speakers, including a session involving Chief Economist Philip Lane in Frankfurt.
It adds that further bond selling could push EUR/USD towards 1.1570. It says there is little support at present for adding new EUR/USD long positions.
Given the Euro’s sensitivity to growth, the current environment is becoming increasingly difficult. Rising long-dated bond yields, with the German 10-year now hovering near 2.8%, are creating headwinds for the economy. This is happening at the same time as elevated energy prices, with Brent crude futures trading consistently above $95 a barrel, further dampening economic prospects.
The European Central Bank is in a difficult position, very similar to the one we observed through much of 2025. Although recent flash PMI data for May showed the composite reading slipping back into contractionary territory at 49.8, persistent core inflation of 2.9% is forcing the ECB to sound hawkish. They must do this to prevent a disorderly sell-off in the bond market, even if it means hiking rates into a slowing economy.
For traders, this means the path of least resistance for the EUR/USD is likely lower. Any further sell-off in the bond market could easily drive the pair towards the 1.0700 support level in the coming weeks. We believe the fundamental case for establishing new long positions in the Euro has not yet been made.
Derivative traders should consider the rising uncertainty in this stagflationary environment. Implied volatility in EUR/USD options may be too low, presenting an opportunity to buy straddles to profit from a larger-than-expected price move, regardless of the direction. The conflicting pressures from weak growth and a hawkish central bank create the conditions for a sharp breakout.
For those with a directional view, buying put options offers a defined-risk way to position for further Euro weakness. As the EUR/USD tests its recent lows, purchasing puts with a strike price near 1.0750 could provide effective downside protection and profit potential. This strategy is preferable to shorting the spot market directly, as it limits potential losses if a surprise headline causes a market reversal.
