EUR/USD: The 3% Drop and the 1.1390 Floor

The euro has fallen sharply against the dollar, dropping 3% over the last fortnight. This move broke decisively below the key 1.1500 psychological level, marking a clear shift in momentum. The pair's recent weakness has pushed it to its lowest point since early August 2025, touching 1.1469 on March 13.

This decline has brought EUR/USD to a critical technical battleground. The market is now testing the 1.1390/1.1400 support zone, a level that held last summer. This area represents the next major floor; a clean break below it would signal a deeper correction is underway.

The immediate risk is heightened by two factors. First, elevated oil prices remain a persistent headwind for the euro. Second, positioning data shows heavy net euro longs in the asset manager community, creating a potential target for further selling if sentiment shifts. ING's Chris Turner warns that another energy spike could push the pair toward the 1.12/1.13 area, underscoring the downside vulnerability at this support level.

The Flow Driver: Energy Prices Fueling Dollar Demand

The primary flow supporting the dollar is the surge in energy costs, which increases dollar demand for European importers. Crude oil has held near $84/85, while European natural gas has opened up 10% in early Europe. This directly raises the cost of dollar-denominated energy for European corporates, pressuring the euro through trade and fiscal channels.

Market expectations for prolonged disruption are now baked in. The probability of normal shipping in the Straits of Hormuz by late April has fallen from 79% to just 44%. This extended uncertainty keeps the dollar bid as a safe-haven and a funding currency for energy trades, as investors seek stability amid a supply shock.

This energy backdrop supports the dollar's strength independently of central bank policy. While the Fed's Beige Book showed subdued growth, the dollar rally is driven by macro energy fallout, not interest rate differentials. European equity benchmarks have fallen 6-7% this month, while US markets are down just 1.5-3%, highlighting the dollar's cushioning effect.

Positioning and Catalysts: What Could Shift the Flow

Market positioning shows a mixed but fragile setup. While broader investor flows are paring euro longs, the asset manager community remains heavily net long euro. This creates a two-speed dynamic where further selling pressure could trigger more adjustments, leaving room for a sharp reversal if sentiment flips.

The ECB's next meeting is a potential catalyst, but the market's expectations are already high. The central bank could deliver a mildly hawkish tone, but the bar is steep. The market already prices close to 50bp of ECB rate hikes this year, meaning any incremental hawkishness may be insufficient to drive a sustained rally.

The primary catalysts for a sustained euro rebound are external. A resolution in Middle East tensions or a reversal in oil prices would directly ease the dollar's energy-driven bid. As ING's Chris Turner notes, the euro will start to move higher over coming months once oil supplies start to flow again. Until then, the 1.1390 support zone remains the critical test.