The Euro rose against the US Dollar after bouncing from a three-week low, now trading above 1.1600. This movement followed threats from President Trump about removing Federal Reserve Chair Jerome Powell and a softer-than-expected US Producer Price Index (PPI) report.
Initially, there were reports of Trump’s intention to dismiss Powell, which he later denied. Despite this, he criticised Powell for delaying rate cuts. Alongside this, the US PPI did not meet expectations, which impacted the currency performance.
Fed’s Beige Book Report
The Fed’s Beige Book revealed a slight increase in economic activity and ongoing uncertainty, particularly around employment and pricing due to tariffs. Meanwhile, the June PPI showed a year-on-year increase of 2.3%, down from May’s 2.6% and below forecasts.
Interest rate projections suggest a high probability of no change at the upcoming Fed meeting, with minimal rate cuts expected by year-end. The European Central Bank (ECB) is anticipated to maintain rates, though some officials favour cuts due to growth risks.
Technically, EUR/USD needs to close above the 20-day Simple Moving Average at 1.1681 to continue its upward trend, with several resistance and support levels identified. The Euro’s value is influenced by various economic factors and data releases.
We see the recent bounce in the Euro not as a sign of its own strength, but rather as a reaction to perceived weakness in the US Dollar. The combination of political pressure on the Federal Reserve and softer inflation data is creating uncertainty. This makes directional bets risky and suggests a more nuanced approach is needed in the coming weeks.
Traders’ Considerations
Traders should not overreact to political statements regarding the central bank’s leadership. Mr. Powell has consistently emphasized a data-dependent stance, and the latest US Consumer Price Index reading of 3.3% validates a cautious approach to cutting rates. The CME FedWatch Tool currently shows the market is pricing in a nearly 65% chance of a rate cut by September, but we believe this can change rapidly with the next employment report.
Meanwhile, the European Central Bank has already initiated its own easing cycle with a rate cut in early June, but signaled it is in no hurry to cut again. Officials there are pointing to persistent wage inflation as a reason for patience. This divergence in signaling between the two central banks creates a complex backdrop for the currency pair.
Historically, such policy divergence, as seen in 2014 when the US prepared to hike rates while Europe was easing, has led to strong, sustained trends. We note that 3-month implied volatility for the currency pair is hovering near multi-year lows around 5.8%, which suggests the market is complacent. This low cost of options could present an opportunity for traders to buy straddles or strangles, positioning for a significant move regardless of the direction.
Therefore, we advise watching key technical levels to confirm any fundamental shift before committing to a strong directional view. A sustained close above the 50-day Simple Moving Average, currently near 1.0810, would be the first signal that the Euro’s upward momentum is credible. Until then, we feel that trading the established range with options is the more prudent strategy.
