EURUSD weakens as economies diverge
On Friday at Jackson Hole, ECB president Christine Lagarde said that EU rates will need to stay high "as long as necessary" to bring inflation down. At face value this sounds hawkish. However, the ECB needs to manage this in the face of a stagnating economy.
In July, the ECB raised its key interest rate by 25 basis points to 4.25%. This is the highest they have been since 2000. However, given the economic weakness there has been some talk about an ECB pause in September.
Moreover, Germany, the primary driver of economic growth in the Euro Area, published a pessimistic German IFO survey on Friday. The survey revealed a deepening decline in business sentiment, raising concerns about the potential emergence of another economic downturn in the largest European economy.
Fed chair Jerome Powell also spoke on Friday and delivered a speech with hawkish tendencies. The US economy is growing, and his speech referred to above trend growth exacerbating inflation.
Source: www.tradingview.com
So, whilst both central banks were hawkish, there is a skew on the ground. This is reflected in the spread between the German and US 2-year spread. The 2-year note is a good reference for monetary policy as the short end of the yield curve tends to adjust quickly to changes in the cost of capital.
In fact, the German/US 2-year spread has charted a head and shoulders top. This suggests that the spread is widening in favour of the US note.
This is being reflected in the EURUSD forex pair. EURUSD's green 5-week EMA has bearishly crossed below its orange 10-week EMA (black ellipse). The weekly RSI has dipped below 50 (blue rectangle). This is the bearish side of the oscillator and denotes an underlying bearish momentum. The longer it maintains on this side, the more pressure will be applied to EURUSD.
Russell Shor
Senior Market Strategist
Russell Shor is a Senior Market Strategist at FXCM, having been promoted to the role in 2025 in recognition of his depth of insight and consistent delivery of high-impact market analysis. He originally joined FXCM in October 2017 as a Senior Market Specialist.
Russell holds an Honours Degree in Economics from the University of South Africa, is a certified FMVA®, and a full member of the Society of Technical Analysts (UK). With over 20 years of experience in financial markets, his work is renowned for its clarity, precision, and strategic value across asset classes.
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