EUR/USD fluctuated between 1.1335 and 1.1365 after the Federal Reserve decided to keep interest rates steady at 4.5%. The decision matched predictions, but market participants are paying close attention to potential shifts towards future rate cuts.

The Federal Reserve’s statement highlighted sustained US employment and economic activity, but acknowledged rising risks due to trade tariffs. This uncertainty led to brief hopes for rate cuts, causing a temporary rise in EUR/USD values.

Impact Of Tariffs

Fed Chair Jerome Powell’s press conference addressed how ongoing tariffs might hinder inflation and employment targets. Powell noted that ongoing policy instability necessitates a cautious approach to adjusting interest rates.

Despite the impact of tariff policies on sentiment, tangible economic data remains largely unaffected, complicating justifications for immediate interest rate changes. The CME’s FedWatch Tool suggests a possibility of a rate cut in July, with a 30% chance of no change.

The Federal Reserve’s primary tools for managing the economy include interest rate adjustments, which impact the US Dollar’s value. In extreme cases, actions like Quantitative Easing can influence the financial system, usually weakening the Dollar. Conversely, Quantitative Tightening positively affects the Dollar’s value.

Taken as a whole, the Federal Reserve’s decision to hold interest rates at 4.5% brings no real surprises—markets had largely priced it in. However, what’s far more interesting, and frankly, more tradable, is what the committee *might* do in the coming meetings, not what they’ve just done. With Powell vocalising hesitancy to push rates higher or lower too quickly, we’re reminded that central banks are not reacting to headlines, but to accumulated, concrete figures. Any misstep—especially tied to monetary policy guided by external pressures like tariffs—could quickly disrupt assumptions embedded in current derivatives pricing.

Market Positioning And Strategy

That volatility we saw around 1.1365 fades just as quickly as it appeared because sentiment, not statistics, moved it. And that’s telling. Temporary EUR/USD strength isn’t something we should build a position on without better macro reasoning to support it. We are seeing inflation and labour remain stable, even resilient, which narrows the room for any sudden dovish tilt. For us, the immediate take-away is to keep positioning flexible—hedging strategies should allow for recalibration as scheduled data releases filter through.

The Fed’s own guidance was anything but hawkish, yet it wasn’t dovish in a convincing way either. Powell puts the weight on “caution,” and with good reason—he understands that whipsawing rates around with uncertain headline risks can do more harm than holding steady. What that tells us is this: the forward curve is going to feel the weight of each non-farm payroll print and CPI release more than usual. Derivatives traders should already be modelling July expiries with this in mind.

Options traders, especially those positioned on EUR/USD, need to consider how implied volatility compresses oddly in moments of indecision like this. If probability modelling shows that outcomes are evenly split between a cut and a hold, the short premium trade could return short-term benefits, provided exposure is neutral relative to directional risk. The 30% chance of no change in July, as suggested by CME’s FedWatch Tool, is not reassuring; it’s a stark reminder that we’re operating on thin convictions.

We also note that balance sheet tactics—Quantitative Tightening, specifically—will quietly support the Dollar, even in the absence of active rate hikes. Powell’s mention of these tools wasn’t incidental. If the Fed starts to stress QT in future statements, even modestly, that ought to bias the Dollar bullish and force EUR/USD down without any rate movement. That’s an angle being slightly overlooked in pricing options further out on the curve.

There’s also nuance in how tariffs are influencing market psychology. Although macro data hasn’t yet deteriorated at the headline level, the rising risk premiums on forward-looking contracts reflect anxiety more than real outcomes. That disconnect feels tradable. Those operating in interest rate swaps or outright forwards should already be reassessing fair value through spreads, now that apparent indecision is dampening directional trades. Passive waiting could bleed returns here.

Although Powell didn’t point to new interventions, we interpret the restraint as tactical—measured stillness while maintaining a readiness to respond. In this current window, the reward lies not in outsized bets, but in well-timed shifts mapped against fiscal decision-making. Tariffs linger unsettlingly, not because of scale but because of unpredictability—and any sudden resolution or escalation could pressure the policy path again.

These days, we’re calculating risk from tweets and tariffs as much as from Treasury yields. The derivatives market thrives on expectations with teeth, and until traders see data shift unmistakably, those 1.1335–1.1365 levels will act more like turbulence than genuine momentum. Flip those narrow gains into spreads, and take profits before consistency returns. Because eventually, it always does.

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