EUR/USD Price Forecast: Dollar Index Hits an 18-Month High as Yields Rise

Why is the US Dollar Strengthening Against the Euro?

The EUR/USD pair remains under pressure as rising US bond yields, expectations for Federal Reserve policy, and concerns about Europe's finances support the US dollar.

EUR/USD shows how many US dollars one euro can buy. When the pair falls, the euro weakens against the dollar.

Three key factors are influencing the pair.

Yields and Fed Expectations Lift the Dollar

The Federal Reserve raised its interest rate to 3.75%–4.00% on 16 September. Minutes released on 7 October suggested that another rate increase could be appropriate before the end of the year.

However, expectations for the next meeting have changed. According to Vantage Markets, CME FedWatch showed a 78% chance that the Fed would keep rates unchanged in October, up from 36% a week earlier. Markets were still pricing in the possibility of a rate hike in December.

Higher US interest rates and Treasury yields can make dollar-based investments more attractive, helping support the US dollar against the euro.

Weak US Jobs Data Limits the Dollar Rally 

The latest US jobs report showed that the economy added only 29,000 jobs in September, far below expectations.

Weaker job growth can raise concerns about the US economy and increase expectations for future interest-rate cuts.

Brown Brothers Harriman said the report had "taken some steam out of the USD rally," as cited by Vantage Markets on 8 October.

This suggests that, although high yields continue to support the dollar, weaker employment data could limit further gains.

French Fiscal Concerns Add Pressure on the Euro

Concerns about Europe's public finances are another factor weighing on the euro.

The gap between French and German 10-year government bond yields widened to 154 basis points on 2 October, according to a Bloomberg report. (A basis point equals 0.01 percentage points.)

This spread measures the additional yield investors demand to hold French government debt rather than German government debt.

A wider spread can indicate that investors see greater risk in French bonds, including concerns about government borrowing and fiscal stability. Uto Shinohara, senior investment strategist at Mesirow Currency Management, said,

"The euro remains under pressure, limiting one of the dollar’s main alternatives,"

Pepperstone's Chris Weston, cited by Reuters, warned about the possibility of financial-market pressure spreading from France's fiscal problems. ING analysts also suggested that the euro could face an additional risk premium of around 2%.

These concerns may weaken demand for the euro, particularly when the US dollar is already benefiting from higher yields.

If worries about French government finances increase, EUR/USD could face further selling pressure. Any improvement in fiscal confidence could help ease that pressure.

EUR/USD Technical Analysis: Key Levels to Watch

The US dollar remains elevated, but its upward momentum may be weakening. The Relative Strength Index (RSI) stood at 47.95, below the neutral 50 level, with lower RSI peaks since 1 October.

EUR/USD-specific levels: [SOURCE NEEDED]

Resistance: 1.1325–1.1350

Support: 1.1210–1.1200

A deeper level is 1.1065. On the upside, a break above 1.1325–1.1350 could bring 1.1410 into focus. These are potential reaction zones, not guaranteed turning points.

Market Outlook / Market Sentiment

• Monitor whether EUR/USD can recover from its 1.1161 low and hold above the current 1.1198 area. A sustained move higher would suggest the dollar’s rally is easing. 
• Conversely, a failure to hold the 1.1161 area could signal renewed dollar demand or a fresh re-evaluation of euro sentiment. 
• Pay close attention to commentary from European Central Bank and Federal Reserve officials.
• Watch for further French fiscal headlines and moves in the France–Germany bond spread.
• Warning: high-impact event Today: The University of Michigan Consumer Sentiment Index (Preliminary) and the Unemployment Rate (CAD) for October are due today; forecast 47.6, previous 48.1. A stronger-than-expected reading could bolster the US Dollar.