EUR/USD increases to approximately 1.1360 as the US Dollar weakens ahead of the Federal Reserve’s impending decision to maintain current interest rates. The US Dollar Index, measuring the Greenback against six major currencies, decreases to around 99.40. According to the CME FedWatch tool, the Federal Reserve is anticipated to keep interest rates unchanged at 4.25%-4.50% in May, with market attention centred on guidance for the remainder of the year.

US Treasury Secretary Scott Bessent projects a 3% economic growth due to new policies. He also suggests the potential for upcoming trade deals, particularly with China. Meanwhile, EUR/USD gains have been capped as the Euro faces its own challenges. Friedrich Merz of Germany’s Conservative party falls short of the votes needed to become Chancellor, acquiring 310 out of 328, missing the required 316 votes.

European Central Bank Rate Expectations

The European Central Bank is expected to reduce interest rates in June, potentially affecting the Euro. However, confidence remains high in the Eurozone’s inflation returning to the 2% target by year-end. Simultaneously, the US-EU trade outlook remains uncertain, with the EU prioritising ties with other trading partners. This continues to affect the Eurozone economy amidst US-led tariffs.

The Euro shows varied performances against other major currencies with the Swiss Franc being the strongest. Technical analysis indicates a stable EUR/USD above 1.1300, facing resistance near 1.1500. Germany’s economy plays a critical role in the Eurozone. It influences the Euro significantly, being the largest economy within the region. The German Bundesbank, recognised for prioritising low inflation, continues to be a major influence on European Central Bank policies.

This current move in EUR/USD towards 1.1360 reflects a broader shift in market tone as the appeal of the US Dollar weakens under expectations that the Federal Reserve won’t adjust interest rates in the near term. The Dollar Index dipping to approximately 99.40 underscores the market’s recalibration of risk around US monetary policy. With most now pricing in a rate pause at 4.25%–4.50%, as per market-derived probabilities, the focus isn’t just on the pause itself, but what comes next. Market expectations are beginning to converge on a dovish guidance tilt, as inflation shows less resistance and growth cools modestly.

Bessent’s forecast of 3% growth, while ambitious, builds on recent legislation and trade prospects. There’s talk of upcoming negotiation rounds with China, which, if productive, could shift capital flows and modify currency strength metrics. Trade optimism, however, sits uneasily beside tepid internal data from the Eurozone. Political uncertainty in Germany worsens the near-term outlook for the Euro. Merz’s inability to gather enough support in the Bundestag underscores the instability in Europe’s strongest economy, and that, naturally, dampens appetite for Euros.

European Central Bank’s Cautious Approach

The European Central Bank’s outlook remains marked by restraint. We’re approaching the June meeting with rate reductions increasingly expected, especially as the macro data aligns more closely with policy-triggering thresholds. Despite the anticipated easing, Eurozone policymakers continue expressing confidence in steering inflation back to the 2% target before the year ends. That view helps support the currency on dips, but upward momentum faces natural limits.

We’ve seen the Euro mixed across the G10. The Swiss Franc’s outperformance has been noteworthy—likely fuelled by haven demand in periods of broader risk aversion and the Swiss National Bank’s conservative stance. EUR/USD remains trapped in a tight range, with notable resistance near 1.1500 and a strong base forming above 1.1300. These levels are widely referenced by trend followers and options traders monitoring breakout scenarios. Volatility has ticked higher but remains controlled.

Germany remains a directional force. Its economic data and policy assertions influence broader Euro pricing, not just because of its size, but because of the Bundesbank’s steadfast role in anchoring ECB decisions. This weight on inflation discipline contributes to why the ECB proceeds more cautiously than peers. That institutional conservatism continues to limit rate-cut speculation from escalating too aggressively.

We recognise that the trade environment remains unstable. The EU has turned focus toward Asia and Latin America, reallocating negotiating efforts while managing US tariff risks. For now, there’s a delicate match between policy direction in Europe and the slower pivot underway in the US—one that will directly inform how volatility develops in currency options and swaps over the next couple of weeks. Tracking real yields and forward guidance will remain key.

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