What was feared has come to pass. The Eurozone economy is descending amid the ongoing crisis in the Middle East. In May, the composite purchasing managers' index (PMI) for the currency block slowed from 48.8 to 47.5 and remains in contraction territory. While the manufacturing sector is holding up somewhat due to new orders, the services sector is sliding. Among the two largest economies, Germany is somewhat stable, whereas France has recorded the worst dynamics in business activity since 2020.

Dynamics of European Business Activity

Alarming news also came from the European Commission, which revised its GDP forecasts for the Eurozone downwards from 1.2% to 0.9% in 2026. In 2025, the gross domestic product increased by 1.4%. Conversely, the inflation estimate was raised from 1.9% to 3%. This is the highest value for the indicator since 2023. Theoretically, this calls for the European Central Bank to tighten monetary policy, but in reality, it is not that straightforward.

When consumer prices accelerate while economic growth slows, it signals stagflation. In such conditions, members of the Governing Council will have diametrically opposing views on monetary policy. The "hawks" will insist on raising the deposit rate to curb CPI, while the "doves" will express concern that high borrowing costs may cripple an already struggling economy. This division within the ECB will restrain bullish attacks on EUR/USD.

Forecasts by the European Commission for the Currency Block's Economy

The United States does not face such issues. The labor market has stabilized, preventing the Federal Reserve from easing monetary policy. Due to its geographical distance from the Middle East conflict and its status as a net exporter of energy goods, the U.S. economy appears resilient, with GDP expanding by 2% in the first quarter.

In this environment, the Fed can focus on that part of its mandate that regulates inflation. The acceleration of consumer prices to 3.8% year-on-year and producer prices to 6% year-on-year in April supports a forecast of increased growth in the personal consumption expenditure index. As a result, the futures market is pricing in a 60% probability of a rate hike in 2026. This supports the U.S. dollar.

Thus, due to differences in economic growth, the Fed can afford to tighten monetary policy, while the ECB must weigh the pros and cons. This divergence favors the bears in the main currency pair and continues to push its quotes lower.

Technically, on the daily chart of EUR/USD, after a slight bounce upwards, there is a resumption of selling attacks. The euro is confidently heading towards previously indicated target levels, namely the pivot points at $1.154 and $1.144. In this situation, preference should be given to selling the regional currency.