EUR/USD edged back up to 1.1460 on Friday after touching a three-month low of 1.1420, yet it was still down about 0.9% over the week. The US Dollar eased from recent highs in thin trading during the US Juneteenth bank holiday, but expectations of Federal Reserve tightening continued to underpin the currency. The Fed kept rates unchanged, and its projections showed nearly half of committee members expect at least one rate hike this year, reinforcing the view that any pull-back in the Dollar may be limited.
US macro data has remained firm: Retail Sales rose more than expected in May, while the Philadelphia Fed Manufacturing Survey pointed to a sharp recovery in June. In the euro area, Germany’s Producer Prices Index rose 2.2% year on year in May versus 1.7% previously, although it undershot the 2.5% forecast. Monthly PPI inflation cooled to 0.3% from 1.2% in April, consistent with easing pressure from the earlier energy shock and, by extension, reduced urgency for the European Central Bank to keep hiking.
Monetary Policy Divergence And EUR/USD Outlook
We see the bounce in EUR/USD to 1.1460 as a temporary pullback in a broader downtrend, not a change in direction. The underlying driver remains the stark difference in monetary policy between a hawkish Federal Reserve and a more cautious European Central Bank. Dips in the US Dollar are likely to be bought, limiting any significant upside for the pair in the coming weeks.
This view is strengthened by the latest US inflation data, which showed core CPI remaining persistent at 3.1% year-over-year, well above the Fed’s target. In contrast, the most recent Eurozone HICP flash estimate was 2.4%, showing a continued cooling trend that reduces pressure on the ECB to pursue further rate hikes. This economic divergence reinforces the fundamental strength of the dollar over the euro.
Trading Strategies And Technical Levels
Given this outlook, we believe derivative traders should consider strategies that benefit from a declining or range-bound EUR/USD. The CME FedWatch Tool is currently pricing in a 75% probability of another Fed rate hike by September, which should cap any rallies. Establishing bear call spreads or buying out-of-the-money puts could offer favorable risk-reward profiles.
Recent positioning data supports this bearish sentiment. The latest CFTC report shows that large speculators have increased their net short positions on the Euro for a fourth consecutive week. This growing institutional consensus suggests that the path of least resistance for the pair is to the downside.
The key technical level to watch is the recent low of 1.1420. A decisive break below this support would signal a continuation of the downtrend and could open the way for a move towards the 1.1250 area last seen in early 2025. We would view any strength back towards the 1.1500 handle as an opportunity to initiate fresh bearish positions.
