The Euro weakens against the US Dollar, dropping to 1.1935 as the Dollar rebounds before the Federal Reserve’s interest rate decision. Expectations for the Fed include two potential rate cuts later in the year, while ECB officials express concerns about the Euro’s strength affecting Eurozone monetary policy.
The Greenback gains support from US officials, with Treasury Secretary Scott Bessent reaffirming a strong dollar policy. President Trump also comments on the Dollar’s decline, suggesting the currency should naturally find its fair level without intervention.
Expected Rate Decision
The Fed is expected to hold rates between 3.75%-3.50%, after previous cuts due to labour market concerns. Recent US labour market data has been stable, and inflation, though moderating, is above the Fed’s target. Chair Powell’s guidance will be important for future rate decisions, as the market anticipates potential cuts later this year.
President Trump plans to appoint a new Fed Chair, with candidates including Rick Rieder and Christopher Waller. ECB member François Villeroy de Galhau is monitoring the Euro’s appreciation impact on inflation, potentially influencing future interest rate decisions. Today, the US Dollar is strongest against the Swiss Franc and weakest against Japanese Yen, with detailed percentage changes provided in the currency heatmap.
Looking back at 2025, we remember the anxiety around the EUR/USD cross as it flirted with the 1.2000 level. The market was pricing in Fed rate cuts while the European Central Bank was growing concerned about a strong Euro hurting inflation. This set up a classic tug-of-war between the two central banks.
Policy Divergence
Today, the situation has evolved as those anticipated Fed cuts did materialize through the second half of last year. However, recent U.S. data shows inflation remains stubborn, with the latest CPI print coming in at a sticky 2.5%, while weekly jobless claims continue to hover near multi-decade lows. This robust economic picture is forcing us to question if the Fed’s easing cycle is already over.
Meanwhile, the ECB’s fears from last year appear justified, as Eurozone inflation is now lagging at just 1.8%, well below the U.S. figure. This divergence in economic performance and inflation is creating a clear policy gap between a potentially paused Fed and a still-dovish ECB. The EUR/USD has since retreated and now trades closer to the 1.15 handle, reflecting this new reality.
For the coming weeks, this growing policy divergence suggests a rise in currency volatility. Derivative traders should consider strategies like long straddles or strangles on EUR/USD, which profit from a significant price move in either direction, regardless of which central bank surprises the market first. The current implied volatility on one-month options is around 6.8%, a level that may seem low if a policy shock occurs.
Given the stronger U.S. economic data, there is a clear bias for dollar strength against the euro. We should consider positioning for further downside in EUR/USD by buying put options or implementing put spreads to limit premium costs. These positions would benefit if the pair breaks below key support levels established in late 2025.
The next U.S. non-farm payrolls and inflation reports will be critical events to watch. A strong showing in either will likely solidify the market’s view that the Fed is on hold for the foreseeable future, putting further downward pressure on the EUR/USD. Any weakness in that data, however, could reignite hopes for more easing and cause a sharp reversal.
