The dollar is a weapon. The Fed just pulled the trigger.
The floor fell out of the currency markets this morning. EUR/USD touched 1.1690 in early London trading. This follows a brutal four day slide initiated by the Federal Open Market Committee. The hawkish minutes released on February 19 caught every major desk off guard. Institutional liquidity evaporated as the realization set in. The Federal Reserve is not finished. They are prepared to break things to keep inflation in the dirt.
Market participants were pricing in a pivot. They were wrong. The minutes revealed a committee obsessed with the persistence of service sector inflation. This sentiment was validated by the Personal Consumption Expenditures (PCE) data released on Friday. The core PCE deflator accelerated to 0.4 percent month on month. This is the highest reading in nearly a year. It paints a picture of an economy that refuses to cool despite restrictive rates.
The Yield Divergence Trap
The spread between US Treasuries and German Bunds is widening. This is a fundamental gravity well for the Euro. When the 10 year Treasury yield pushes toward 4.5 percent, capital flees the Eurozone. The European Central Bank is trapped. They face a stagnant economy and cannot match the Fed’s aggressive posture without risking a sovereign debt crisis in the periphery. According to Bloomberg market data, the yield differential has reached its widest point since late 2024.
Technical analysis shows a breakdown of major support levels. The 1.1780 level mentioned in recent alerts was a psychological bastion. It failed. We are now looking at a vacuum down to the 1.1500 handle. High frequency trading algorithms are front running the trend. The momentum is purely one sided. The following table illustrates the stark divergence between the two economic blocs as of February 23.
| Economic Metric | United States (USD) | Eurozone (EUR) |
|---|---|---|
| Policy Interest Rate | 5.50% | 4.00% |
| Q4 GDP Growth (Annualized) | 3.2% | 0.1% |
| Core Inflation (YoY) | 2.9% | 2.4% |
| 10Y Benchmark Yield | 4.48% | 2.35% |
Visualizing the Five Day Collapse
The velocity of this move is what concerns risk managers. It is not a slow grind. It is a vertical drop. The chart below tracks the EUR/USD exchange rate from the release of the Fed minutes through this morning’s open. The steepness of the curve reflects a total repricing of the 2026 rate path. Per Reuters currency analysis, the market has stripped out three anticipated rate cuts that were previously baked into the curve.
The Mechanics of the Euro Selloff
Why is the Euro failing so spectacularly? It is a matter of real interest rates. While nominal rates in Europe are high by historical standards, they are insufficient to combat the capital flight toward the US dollar. The US economy is exhibiting a rare ‘no landing’ scenario. Productivity is up. Labor remains tight. Consumer spending has not buckled. This allows the Fed to keep the federal funds rate at its peak for longer than anyone anticipated.
The CME FedWatch Tool now shows only a 12 percent chance of a rate cut in May. Just two weeks ago, that probability was over 60 percent. This massive shift in expectations is the primary driver of the current volatility. Traders who were short the dollar are being liquidated in a classic squeeze. The pain is concentrated in the leveraged carry trades that relied on a weakening greenback.
Brussels has no easy answers. If the ECB cuts rates to stimulate growth, the Euro will plummet further, importing inflation through higher energy and commodity prices. If they hold rates steady, they risk a deep recession. It is a policy cul-de-sac. The structural weakness of the Eurozone is being exposed by the sheer force of American exceptionalism in the data. There is no safety net here.
The next critical data point arrives on March 6 with the non farm payrolls report. If the labor market remains as resilient as the PCE data suggests, the 1.1500 level will be tested before the spring. Watch the US 2 year yield. If it breaks above 4.75 percent, the Euro has nowhere to go but down.
