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Euro on Track for Biggest Monthly Drop Since July on Fed-ECB Policy Divergence
The euro is on track for its biggest monthly drop in a year. The Fed's hawkish tilt and dovish ECB signals widened the yield gap. PCE data this week could shift expectations.
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The euro is heading for its biggest monthly decline since July last year. The move followed the Federal Reserve's hawkish policy pivot and dovish comments from European Central Bank President Christine Lagarde. The yield spread between US and German 10-year bonds has widened, pushing capital out of the eurozone and dragging EUR/USD lower in five of the last six sessions.
European households have been saving more. In 2025, they saved 15% of disposable income, up from 12.5% before the pandemic, Eurostat data show. US households saved just 2.6% in April, down from nearly 7% at the start of 2020. Since 2019, US consumption has grown 18%, while eurozone consumption rose only 5.5%. That gap helps explain why eurozone GDP has consistently underperformed US growth.
The ECB faces its own headwinds. The Middle East conflict, an energy crisis, political turmoil in France, and the prospect of US tariffs have all weighed on household and business confidence. The eurozone economy is teetering near contraction and could slip into negative territory in the second quarter, several economists said. That backdrop constrained Lagarde's ability to sound hawkish.