USD Surges as EUR Index Stumbles: Powell's Dovish Pivot Reshapes Currency Markets

The Setup: Dollar Rebounds While Euro Falters

After Friday’s dramatic slide triggered by Federal Reserve Chair Jerome Powell’s dovish commentary at Jackson Hole, the Greenback staged a sharp recovery on Monday. EUR/USD retreated from its four-week peak of 1.1742, slipping to around 1.1646 and breaching the psychologically important 1.1700 support level. The pullback represents a 0.60% daily decline as the US Dollar Index (DXY) reclaimed ground, pushing above 98.20—a reversal of Friday’s near-1% tumble.

The EUR Index tells the fuller story: while the Euro weakened broadly, the divergence in central bank policy trajectories is the real driver. The Fed’s growing tilt toward rate cuts contrasts sharply with the European Central Bank’s (ECB) more cautious stance, creating headwinds for the single currency.

Mixed German Data Can’t Rescue the EUR

Germany’s August IFO Business Climate Index offered a mixed picture that failed to support EUR buyers. The headline index rose to 89.0, beating expectations of 88.6 and signaling improved business sentiment. However, the Current Assessment component disappointed, sliding to 86.4 versus the forecast of 86.7—suggesting companies are upbeat about the future but wary about present conditions.

This disconnect reflected the broader Eurozone malaise: structural resilience masked by immediate concerns. ECB President Christine Lagarde reinforced this caution in Monday’s remarks, describing the Eurozone as “resilient but not thriving.” She projected just 1% growth for 2025 and warned of “major disruption” from elevated US tariffs hitting Europe’s export engine—hardly the tone to rally the EUR Index.

The Policy Divergence That’s Reshaping EUR/USD

The currency pair’s weakness boils down to one core issue: policy expectations are splitting. Fed rate-cut bets are intensifying following Powell’s Jackson Hole dovish signals, with September cuts increasingly priced in. Meanwhile, the ECB remains locked in a holding pattern, giving the US Dollar renewed demand across the board.

Lagarde’s downbeat assessment signals the ECB will maintain its wait-and-see approach through at least Q3, widening the rate policy gap with the Fed. This structural divergence typically favors USD strength—exactly what we’re seeing in EUR/USD’s retreat.

What’s Next for EUR/USD: A Data-Heavy Week Ahead

The trading calendar offers several inflection points that could reset the pair’s trajectory:

US side: Consumer Confidence and Durable Goods Orders arrive Tuesday, setting the tone. Thursday brings revised Q2 GDP and Initial Jobless Claims. Friday’s Core PCE inflation print—the Fed’s preferred gauge—could cement September rate-cut expectations or throw a wrench into the narrative.

Eurozone side: Thursday’s ECB Monetary Policy Meeting Accounts will provide fresh insight into the central bank’s thinking. Friday rounds out the week with Germany’s Consumer Price Index and Retail Sales, offering clues on inflation momentum and household spending health.

The EUR Index movements this week will likely hinge on which data proves more dovish: hawkish US inflation could support EUR/USD, while weak Eurozone consumer data would reinforce EUR weakness.

Bottom Line

EUR/USD’s pullback from four-week highs reflects more than short-term momentum—it signals a widening chasm between Fed and ECB policy directions. Until inflation and growth data shift expectations or Lagarde hints at easing flexibility, expect the structural headwinds on the EUR to persist. Traders should monitor this week’s economic calendar closely for any signs that might narrow the policy divergence and provide fresh support for the single currency.