The EUR/USD currency pair has staged a significant rally, climbing over 0.70% on Thursday as a disappointing US PPI report, combined with fresh tariff threats from the US President, triggered a broad selloff in the US Dollar (USD). 

The pair traded at 1.1575 at the time of writing, within striking distance of the nearly three-year high of 1.1631 reached earlier in the week. The brokers at Fimatron provide a detailed breakdown of this topic in their latest article.

Disinflation Narrative Pressures the Greenback

The primary catalyst for the EUR/USD surge was the latest release from the US Bureau of Labor Statistics (BLS). The May Producer Price Index (PPI) showed that inflationary pressures in the United States continue to moderate. 

Headline PPI rose just 0.1% month-over-month, below forecasts, and was up 2.6% year-over-year, only marginally higher than April’s 2.5%. The Core PPI, which excludes food and energy, decelerated to 3.0% YoY from 3.1% previously, reinforcing the disinflation trend.

This data came on the heels of a softer-than-expected Consumer Price Index (CPI) print on Wednesday, which confirmed cooling inflation across consumer categories. These twin releases have fueled speculation that the Federal Reserve (Fed) will remain on pause, or even pivot dovish later in the year.

Adding to the narrative, US jobless claims ticked higher, signaling potential labor market weakness, which could further constrain Fed policy tightening. As a result, the US Dollar Index (DXY) extended its multi-session downtrend, with the Greenback sharply sold off against most major currencies.

US’s Tariff Rhetoric Stirs Market Anxiety

Risk sentiment was further jolted by the US President’s surprise statement that he plans to send letters to several countries unilaterally setting new tariff rates ahead of a July 9 “Liberation Day” deadline. This move introduces renewed trade war uncertainty, raising fears of retaliatory actions that could weigh on global growth and intensify the “Sell America” trade.

Markets reacted swiftly, with equity indices pulling back, Treasury yields falling, and safe-haven flows moving into higher-yielding currencies like the Euro (EUR) and Swiss Franc (CHF). Traders increasingly shifted toward risk-off positions, providing an additional tailwind to the EUR/USD rally.

ECB Signals End of Easing Cycle

While the US macro landscape points to slowing momentum, the European Central Bank (ECB) delivered a more hawkish message. ECB Executive Board Member Isabel Schnabel stated that the monetary easing cycle is coming to an end, asserting that financial conditions are no longer restrictive and that the ECB has likely reached a neutral rate.

Other ECB policymakers echoed similar sentiments. Villeroy downplayed fiscal concerns, stating that the 5.4% budget deficit target for 2025 remains achievable. 

Meanwhile, Patsalides emphasized the ECB’s flexibility and agility on rates, and Simkus acknowledged that while some rate cuts remain possible, inflation risks may soon undershoot projections, reinforcing the pause narrative.

Importantly, market pricing now reflects reduced expectations for a 25-basis point rate cut at the ECB’s July policy meeting, bolstering the Euro’s appeal relative to the weakening US Dollar.

EUR/USD Technical Outlook: Bullish Momentum Accelerates

Technically, the EUR/USD pair has entered a bullish channel, as evidenced by a series of higher highs and higher lows. The break above the psychological 1.1600 level has opened the door for a possible move toward 1.1650, and eventually the 1.1700 handle.

The Relative Strength Index (RSI) is trending higher but remains below overbought territory, suggesting that bulls are in control and further upside is possible. However, a short-term correction cannot be ruled out. 

If EUR/USD dips below 1.1550, this would indicate waning momentum and could spark a retracement toward 1.1500. Deeper support lies at 1.1450, with further technical floors at the 20-day Simple Moving Average (SMA) at 1.1366 and the 50-day SMA at 1.1304.

Market Sentiment: EUR/USD Supported in Risk-Off Trade

In summary, the EUR/USD’s rally is driven by a confluence of dovish US data, escalating trade tensions, and hawkish ECB commentary. The risk-off environment has reduced demand for the US Dollar, while supporting flows into the Euro, viewed as a safer and higher-yielding alternative.

While US-China dialogue and central bank decisions in the coming weeks may shift sentiment, the current setup favors continued EUR/USD strength. So long as the 1.1500 support level holds, bulls appear well-positioned to test fresh multi-year highs in the near term.