Wall Street Capitulates on Euro Bull Bets as Dollar Gains
1h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
EUR/USDforexdollar
Fazen Markets Editorial Desk
Collective editorial team · methodology
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According to reporting by Bloomberg on June 28, 2026, major Wall Street banks have formally dropped their outlook for a stronger euro this year. The EUR/USD traded near 1.0520, reflecting a quarterly decline of 4.2%. The capitulation stems from a conviction that the US Federal Reserve will maintain a faster pace of interest rate hikes than the European Central Bank, attracting capital flows into dollar-denominated assets.
The dollar has not held this large an interest rate advantage over the eurozone since the 2022 monetary policy cycle. In that period, the EUR/USD fell from 1.1490 to a 0.9520 trough by September 2022, a decline exceeding 17%. The current divergence is reigniting similar currency flow dynamics.
The current macro backdrop features a resilient US economy with core inflation at 3.1% year-over-year, versus 2.4% in the eurozone. The US 2-year Treasury yield trades at 4.65%, nearly 200 basis points above the German 2-year Schatz yield of 2.70%. This yield gap provides a direct incentive for global capital to favor the dollar.
The catalyst for the recent bank downgrades was the June FOMC meeting. The Fed's updated dot plot signaled a median expectation for 50 basis points of additional tightening in 2026. Conversely, the ECB's most recent communications have adopted a more cautious tone, citing weaker regional growth data.
Specific positioning data shows the rapid unwinding of bullish euro bets. The net long euro position held by leveraged funds, as reported by the CFTC, fell by 52,000 contracts in the week ending June 21. This represents the largest single-week liquidation since March 2025.
Currency volatility has spiked as positions adjust. The one-month implied volatility for EUR/USD options reached 9.5%, up from a 6.8% low in April. The euro's year-to-date performance against major peers shows a clear pattern of dollar strength.
EUR/USD performance vs. peers (Year-to-date, as of June 28, 2026):
| Currency Pair | YTD Change |
|---|---|
| EUR/USD | -5.8% |
| EUR/GBP | -1.2% |
| EUR/JPY | +3.1% |
| EUR/CHF | +0.5% |
Analyst forecasts reflect the shift. The median year-end target from ten primary dealers for EUR/USD has been revised down to 1.0700 from a previous consensus of 1.1200 set in early May.
Second-order effects are materializing across equity sectors. European exporters with significant US revenue, such as those in the DAX index, stand to benefit from a weaker euro. Companies like Siemens (SIEGY) and Volkswagen (VWAGY) could see a 3-5% boost to translated earnings per share based on current forex levels.
Conversely, US multinationals with large European revenue exposure face an earnings headwind. Firms like McDonald's (MCD) and Apple (AAPL) may see modest downward revisions to Q3 EPS estimates. The S&P 500's Information Technology sector derives over 20% of its revenue from Europe.
A key risk to the bearish euro thesis is a sharper-than-expected slowdown in the US economy. If US growth data deteriorates rapidly, the Fed may pause its hiking cycle, narrowing the interest rate differential. This could trigger a short squeeze, forcing bearish euro positions to cover.
Positioning data indicates institutional flow is moving into dollar crosses and out of euro-centric trades. There is increased demand for long USD/CHF and short EUR/GBP as traders seek relative value plays within a broader dollar-strength theme.
Markets will focus on two immediate catalysts: the US non-farm payrolls report on July 8 and eurozone CPI inflation data on July 9. A strong US jobs print exceeding 250,000 new positions would reinforce the Fed's hawkish stance. Eurozone inflation remaining at or below 2.4% would validate the ECB's caution.
Technical levels are critical for the EUR/USD pair. Immediate support rests at the 1.0500 psychological level, with a breach opening a path toward the 1.0340-1.0380 zone, last tested in November 2025. Resistance is now firmly established at the 1.0650 level, which coincides with the 50-day moving average.
A failure of the dollar to strengthen on strong US data would signal exhaustion in the current trend. This would be confirmed if the EUR/USD pair holds above 1.0480 following the payrolls release.
A weaker euro typically boosts the share prices of European export-heavy companies, as their overseas revenue translates into more euros. Major eurozone equity indices like the Euro Stoxx 50 and Germany's DAX have a high concentration of global exporters. Historically, a 10% decline in the trade-weighted euro has correlated with a 4-6% outperformance of the DAX relative to the S&P 500 over the subsequent quarter, all else being equal.
The interest rate gap today is driven more by growth differentials than inflation alone. In 2022, both central banks were aggressively hiking to combat soaring inflation, with the Fed moving slightly faster. Today, US economic growth is projected at 2.4% for 2026 versus 0.8% for the eurozone, according to IMF forecasts. This growth chasm gives the Fed more room to tighten policy, making the current divergence potentially more durable for currency markets.
The correlation coefficient between the EUR/USD exchange rate and the US-Germany 2-year government bond yield spread has averaged -0.75 over the past five years. A negative correlation means a widening yield spread in the dollar's favor typically pressures the euro lower. The current spread of approximately 195 basis points is near the 90th percentile of its five-year range, statistically supporting significant euro weakness.
The euro's weakness is a direct function of a widening growth and interest rate chasm that favors the US dollar for the foreseeable future.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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