EUR/USD climbed back above 1.1400 on Friday after rebounding from 13-month lows at 1.1325, as a softer US Dollar combined with falling oil prices underpinned the single currency, even while the broader downtrend remained in place. Brent crude slipped below $73.00 a barrel, returning to pre-war levels; it is down 9% on the week and more than 30% over the past six weeks, easing pressure on oil-importing Eurozone economies and improving risk tone.
Cheaper energy, however, reduces the urgency for further ECB tightening, which may cap any Euro recovery. An ECB survey showed consumers expect inflation of 3.5% over the next 12 months, down from 4.0% previously, while respondents also see GDP contracting in the medium term, a backdrop that could encourage a more cautious monetary stance. In the US, Dollar weakness was limited by firm data and higher Fed rate expectations, after the PCE Price Index rose to 4.1% year-on-year in May, its fastest pace in three years, with the Michigan Consumer Sentiment reading due later.
Temporary Euro Support from Oil Decline
We see the EUR/USD pair trying to hold above 1.0850 after a recent bounce from yearly lows near 1.0780. The recent slide in Brent crude prices from over $95 to near $85 a barrel is giving the euro some temporary breathing room, as it lowers energy import costs for the continent. This drop in oil provides a fragile floor for the currency for now.
Limited Upside for Euro Amid Diverging Monetary Policy
However, we believe this euro strength is fragile and unlikely to last. With the latest Eurostat data showing Eurozone inflation has cooled to 2.3% and recent Q1 GDP growth at a sluggish 0.1%, the European Central Bank is signaling a pause. This puts a significant cap on the euro’s potential for any sustained rally.
Meanwhile, the US Dollar’s recent dip looks more like a buying opportunity than a new trend. The latest US jobs report showed a robust 210,000 positions added in May, and with core inflation remaining sticky at 3.1%, the Federal Reserve has little reason to consider rate cuts. This fundamental divergence between a slowing Eurozone and a resilient US economy should reassert itself soon.
Given this outlook, we are looking at strategies that benefit from a stronger dollar against the euro in the coming weeks. Selling out-of-the-money call options on EUR/USD or establishing bearish put spreads could be effective ways to position for a potential move back towards the 1.0780 lows. Volatility is relatively low, making these defined-risk strategies attractive.
Traders still remember the stubborn US inflation of 2022-2024, which makes the market quick to believe in a hawkish Fed at the first sign of persistent price pressures. This historical precedent supports our view that any dollar weakness will be short-lived. The euro continues to face significant headwinds from a slowing economy and a central bank that has likely finished its tightening cycle.
