We have seen EUR/USD bounce to the upside, but we see the bounce as a sell. Our view of the fundamentals, sentiment, and technicals below.

Fundamentals

Euro fundamentals are below. If you want to view USD fundamentals, check out the article here

The eurozone flash CPI estimate for July was published last week, following a sub-consensus 1.8% print released for Germany yesterday. Expectations are for a modest slowdown from 2.0% to 1.9% in the headline rate, with core unchanged at 2.3%. That may not be enough to trigger any serious dovish repricing of European Central Bank rate expectations, but equally, could prevent any residual cut speculation from being priced out, especially after a poor GDP print and a terrible tariff deal with the US.

Eurozone second-quarter growth was marginally better than expected, at 0.1% QoQ, which we expect to move negative in the coming quarters.

Markets moved to price out an ECB cut (only 15bp priced in by year-end) after last week’s central bank meeting, but low inflation paired with soft growth expectations can lead to a dovish turn.

A big overhang for the EUR is the recent trade deal, which will hit Eurozone growth...

In terms of the euro, the trade deal with the US is clearly in favor of the US: The framework agreement—still pending ratification by EU member states and the European Parliament—imposes a 15% tariff on most EU exports to the United States. That’s half the originally threatened 30%, but still far above historic norms.

In return, the EU commits to energy imports worth $750 billion over the next three years—including liquefied natural gas (LNG) and petroleum products. And then there’s the MAGA component: investment in the American heartland. A whopping $600 billion is to be mobilized from European industries and invested in the United States, with a strong focus on defense manufacturing.

“The message from Trump is clear: if Europe wants to keep fighting its proxy war in Ukraine, it will now have to pay for American weapons. Nothing comes free—not even Europe's newly rediscovered belligerence, which the U.S. appears increasingly reluctant to subsidize. For selected strategic goods—aircraft components, key chemicals, semiconductor equipment, and generic pharmaceuticals—a “zero-for-zero” rule will apply.” (ZEROHEDGE)

Sentiment

While we have seen euro speculative longs trimmed, speculative longs remain elevated while commercials remain heavily short, which in our view points to more downside in EUR/USD:

How bad is the Economy in Eurozone?

A few charts below...

Germany, the Powerhouse of the zone? It Can't save the Zone

Germany is on a path to losing its reputation as a fiscally responsible nation. Through unchecked spending, the federal government is steering the country into stormy waters. On Thursday, Handelsblatt reported the budget gap. By 2029, previously unfunded additional debts are expected to grow from €144 billion to €150 billion, according to several government sources. These are not part of the planned federal debt but come on top of it. Most recently, the coalition agreed to bring forward a planned pension supplement for mothers to 2027, adding another €4.5 billion in spending.

"These numbers are already alarming—but we are still in the calm before the storm. In 2025, the net new debt ratio is expected to reach 3.2% of GDP. This includes roughly €82 billion in new federal debt, €15 billion in additional borrowing from states and municipalities, and about €37 billion in federal “special funds”—off-budget shadow debt. This forecast will collapse the moment the German economy sinks deeper into recession. Rising unemployment and falling tax revenues will put further strain on the federal budget and social welfare funds. While politicians still feel safe with public debt at 63% of GDP, once we include the €1 trillion debt program of the Merz government, debt levels could surpass 90% of GDP by the end of the decade." (Thomas Kolbe)

Europe relies on Germany historically, but this time it won't save the zone.

Germany is going to increase debt while at the same time the economy is struggling and tax revenues are falling, but the market is complacent about the risks - this quote and chart are from July 14th

"Germany remains one of the few AAA countries in the world. Fitch affirms Germany’s top rating with w/a stable outlook. Despite €850bn in new spending plans & rising debt (to 70.4% of GDP by 2029 from 62.5% in 2024), strong institutions, fiscal credibility, and external surpluses support the rating. Growth remains weak; reforms are needed. The markets also support the positive rating. The price to hedge against bankruptcy (CDS price) has fallen to a multi-year low." (Holger Zschäpitz)

Cheap energy in Europe is a thing of the past - the Nordstream cheap energy is gone, Germany has dropped nuclear and imports natural gas and oil at far higher than in the past...

The car industry, once a huge export market, is in long-term decline and won't recover quickly.

Technicals

We see the recent bounce as a sell – our view of the technical levels to watch below.