EUR/USD Trades Lower as Eurozone Growth Slows and ECB Signals Hikes

Key Takeaways

-Euro area business activity contracted in May, with the composite PMI falling to 47.5.
-German Q1 GDP and Ifo sentiment offered minor support.
-EUR/USD remains under pressure as inflation risks and ECB rate-hike expectations persist.
-US-Iran talks and oil prices continue to influence euro and dollar dynamics

EUR/USD traded near 1.1604, down 0.0090, or 0.08%, as traders digested weaker-than-expected eurozone activity. The May composite PMI fell to 47.5 from 48.8, the fastest contraction since late 2023.

The reading sits below the 50 expansion threshold, highlighting demand weakness amid higher energy costs. The survey’s price gauges suggest inflation may approach 4% in coming months, raising stagflation concerns for the ECB and weighing on the euro.

German Data Provides Partial Support

Despite the broader eurozone slowdown, Germany’s Q1 GDP confirmed growth at 0.3%, while Ifo business sentiment rose to 84.9. These metrics offered limited relief for the euro, keeping EUR/USD from testing lower support levels. The German figures show resilience in domestic demand and business confidence, but energy-driven inflation still challenges the region’s growth outlook.

ECB Hike Expectations Limit Euro Downside

Money markets are pricing at least two ECB rate hikes before year-end, reflecting central bank caution as energy costs feed into inflation. The European Commission projects eurozone GDP growth slowing to 0.9% in 2026, with inflation rising to 3.0% from a previous 1.9% estimate.

The combination of slowing growth and rising inflation creates a two-sided trade for the euro: higher rates support EUR/USD, while weaker economic activity limits the upside.

US-Iran Talks Influence Dollar and Oil

US-Iran negotiations remain a major driver. Positive progress could ease oil prices, reduce inflationary pressure, and weaken the dollar, supporting the euro. Conversely, stalled talks or renewed conflict could push crude higher, lift global yields, and keep the dollar firm. The Strait of Hormuz continues to be the key chokepoint, linking geopolitical risk directly to EUR/USD performance.

Technical Analysis

EUR/USD trades near 1.1607, below the 5-, 10-, and 20-day moving averages, signaling weakening momentum. The immediate support is at 1.1600, with further downside targets at 1.1550 and the March low near 1.1410.