Euro pares initial gains as US Dollar rebounds

• Near 1.1213, the Euro loses ground as the US Dollar recovers.
• Rising oil prices appear to have underpinned the US Dollar’s rebound.
• Other Eurozone countries face spillovers from French fiscal risks.

At around 1.1213, the Euro (EUR) is little changed against the US Dollar (USD) in Tuesday’s European session, having relinquished its earlier gains. A further rise in oil prices has prompted a sharp US Dollar recovery, pulling the major currency pair lower.

From an intraday low of 101.74, the US Dollar Index (DXY) has recovered to around 101.91 during European trading, although it remains 0.13% lower. The index tracks the Greenback against a basket of six major currencies.

A 2.15% rise takes WTI Oil to around $100.20, its highest price in more than a month. The oil risk premium has increased amid continuing conflict in the Middle East and Iran’s threats to extend its blockade to other sea routes.

As higher oil prices unanchor inflation expectations globally, the likelihood of central banks raising interest rates increases.

Over the past week, concerns surrounding Artificial Intelligence (AI)-related optimism have weighed on the US Dollar’s performance.

Strong overseas demand linked to AI optimism has played an important role in US markets, according to analysts at MUFG, who describe them as “a major beneficiary of strong foreign investor demand driven by AI-related optimism.” Their analysis shows that foreign investors bought “USD942 billion of US equities in the twelve months to July, while purchases of US corporate bonds increased sharply to USD452 billion over the same period.” In MUFG’s view, these “sizeable inflows highlight how the USD has become increasingly tied to investors’ search for higher returns in US financial markets, rather than benefiting from its traditional safe-haven status.” The analysts nevertheless warn that “this dynamic also leaves the USD more exposed to a reversal if sentiment towards AI deteriorates.”

The Euro’s appeal has also suffered as France’s fiscal turmoil spills over into other Eurozone countries.

The latest political upheaval in France has reverberated through European markets, Deutsche Bank analysts observe, adding that “those market concerns around French debt cascaded across other countries and asset classes too.” As evidence of the spillover, they note that “the Italian 10yr spread over bunds was also up +4.7bps on the day to 111bps, whilst Spain’s was up +1.2bps to 62bps.”

EUR/USD Remains Under Near-Term Technical Pressure

Trading at 1.1219 on the daily chart, EUR/USD retains a bearish short-term bias below the 20-period exponential moving average (EMA) of 1.1273. Failure to recover this short-term EMA indicates that overhead supply continues to limit rallies. Meanwhile, the Relative Strength Index (14) reads 38.5, below the neutral 50 threshold, suggesting persistent downward pressure rather than a clear recovery.

The 20-period EMA at 1.1273 provides the first resistance on the upside. A break above it is needed to temper the prevailing bearish bias and pave the way for a more lasting rebound. Until then, moves towards the EMA are likely to attract fresh selling. With no nearby technical support evident on the chart, the pair risks further declines if sellers reassert control.

(The technical analysis of this story was written with the help of an AI tool. Know more.)