The euro fell against the dollar on Monday as trading resumed after the extended US Independence Day weekend. EUR\/USD was around 1.1421, down 0.12% on the day, with early-week flows described as subdued while markets recalibrated expectations for the Federal Reserve and the European Central Bank. Lower oil prices following last month\u2019s interim US-Iran peace deal eased inflation worries, while weaker-than-expected US Nonfarm Payrolls and softer Eurozone inflation data reduced the perceived odds of a near-term Fed move and another ECB increase this year.<\/p>\n
Markets continued to frame policy as restrictive given inflation levels remain above target, with attention fixed on the 2% goal. The CME FedWatch Tool showed a 56% probability of a rate hike at the September meeting, while a September ECB hike was priced at less than a 50% probability. The rate gap still favoured the dollar, with the Fed\u2019s policy rate at 3.50%-3.75% versus the ECB\u2019s 2.25% deposit rate, supporting the US Dollar Index at about 101.04 after a low of 100.56. In data, the ISM Services PMI printed at 54.0 for June, down from 54.5 in May, extending expansion to a 23rd month.<\/p>\n
We see the Euro trading on the defensive against the US Dollar around the 1.0750 level today, July 6, 2026. This reflects the market’s focus on the diverging monetary policy paths for the Federal Reserve and the European Central Bank. The upcoming weeks will be defined by which central bank appears more committed to its current stance.<\/p>\n
While headline inflation has fallen, we are focused on the stickiness of core prices, which remain above the 2% target in both economies. The latest US Core PCE inflation figure is running at 2.6%, and the Eurozone’s is similar at 2.7%. This persistent inflation makes it difficult for either central bank to signal aggressive rate cuts with confidence.<\/p>\n
Last week\u2019s weaker-than-expected US jobs report, which showed payrolls increasing by only 209,000, has strengthened the case for the Fed to begin easing policy. In fact, the CME FedWatch Tool shows that we and other traders are now pricing in a greater than 65% probability of a rate cut by September. This anticipation of lower US rates is a primary headwind for the US dollar.<\/p>\n
Meanwhile, the European Central Bank already delivered a rate cut last month but has since signaled a pause. Policymakers there seem concerned that strong wage growth, which averaged 4.7% in the first quarter, could reignite inflation if they ease policy too quickly. This cautious stance from the ECB could offer some support for the Euro in the near term.<\/p>\n
The interest rate differential, with the Fed’s policy rate at 5.25% and the ECB’s at 3.75%, still heavily favors the US dollar. However, the critical factor for traders now is the expected *change* in that differential, with the Fed poised to cut sooner. This dynamic suggests that EUR\/USD volatility will increase, making options strategies that benefit from price swings, such as long straddles, potentially profitable.<\/p>\n
Looking at implied volatility in the options market, the 3-month measure for EUR\/USD is around 6.5%, which is not high by historical standards. This indicates it may be relatively cheap to purchase options to position for a significant breakout in the currency pair. We will be closely watching the upcoming US Consumer Price Index (CPI) report next week for the next major catalyst.<\/p>\n\n\n\n