Key Moments
- EUR/USD traded near 1.1620 in Asian hours on Monday. This marked a sixth straight session of subdued performance.
- Fed officials stressed that curbing inflation remains the top priority. As a result, markets raised the implied probability of a December rate hike to nearly 48%, up from 14% a week earlier.
- Meanwhile, expectations for a 25 bps ECB deposit rate increase to 2.25% in June may help limit downside pressure on the Euro.
Dollar Advances as Fed Signals Tougher Line on Inflation
EUR/USD stayed under pressure for a sixth consecutive session. It traded around 1.1620 during Monday’s Asian session. The US Dollar (USD) gained strength during this period. This move followed a shift in tone from the US Federal Reserve (Fed) toward tighter inflation control.
Several Fed policymakers recently emphasized inflation control as their main goal. In addition, they signaled that further interest rate increases may still be needed if price pressures persist. Consequently, markets quickly adjusted their outlook for US policy.
As a result, the implied probability of a December rate hike rose to nearly 48%. This compares with just 14% one week earlier, according to the CME FedWatch tool.
Geopolitical Tensions Bolster Safe-Haven Demand for USD
The US Dollar also gained support from safe-haven flows. These flows increased due to ongoing geopolitical tensions.
The United States (US) and Iran remain far from any agreement. Such an agreement would be needed to end hostilities and reopen the Strait of Hormuz. Meanwhile, US President Donald Trump warned Iran to make progress or face new consequences.
In addition, the Strait remains effectively closed. This has pushed global oil prices higher. As a result, economies that rely on energy imports face rising costs. At the same time, risk sentiment weakened further after Chinese leader Xi Jinping warned President Trump about Taiwan as a potential flashpoint.
ECB Hawkishness Provides Partial Support for the Euro
Despite USD strength, the Euro’s downside may be limited. This is because markets expect a more hawkish European Central Bank (ECB) stance.
ECB policymakers have signaled possible rate hikes to control inflation expectations. Furthermore, a Reuters survey shows that 85% of economists expect a 25 bps deposit rate increase to 2.25% in June. This marks a sharp rise from earlier expectations of just over half before the April meeting.
| Factor | Impact on EUR/USD | Details |
|---|---|---|
| Fed policy stance | Bearish for EUR/USD | Markets price a higher chance of a December Fed hike. Probability rose to nearly 48% from 14%. |
| Geopolitical risk | Supportive for USD | US–Iran tensions and the Strait of Hormuz closure boost safe-haven demand and lift oil prices. |
| ECB expectations | Potential support for EUR | Most economists expect a 25 bps ECB rate hike to 2.25% in June, according to a Reuters poll. |
Background: Euro, ECB, and Key Market Drivers
The Euro is the common currency of 20 European Union countries in the Eurozone. It ranks as the second most traded currency globally after the US Dollar. In 2022, the Euro accounted for 31% of all foreign exchange transactions, with daily turnover exceeding $2.2 trillion.
EUR/USD is the most traded currency pair in the world. It represents about 30% of all FX transactions. Other major Euro pairs include EUR/JPY at 4%, EUR/GBP at 3%, and EUR/AUD at 2%.
Role of the ECB in Shaping Euro Dynamics
The European Central Bank (ECB), based in Frankfurt, manages monetary policy for the Eurozone. It also serves as the region’s central banking authority. Its main mandate is price stability, which means controlling inflation and supporting economic growth when needed.
The ECB mainly uses interest rates to achieve its goals. Higher rates or expectations of rate hikes usually support the Euro. In contrast, lower rates or expected cuts tend to weaken it.
The ECB Governing Council makes policy decisions eight times per year. It includes heads of national central banks and six permanent members, including President Christine Lagarde.
How Inflation and Economic Data Influence the Euro
Eurozone inflation is measured by the Harmonized Index of Consumer Prices (HICP). This is a key indicator for the Euro. If inflation rises above expectations, especially beyond the 2% ECB target, the central bank may raise interest rates.
Higher rates usually strengthen the Euro. This happens because they attract more foreign investment. On the other hand, weak inflation can lead to lower rates and pressure the currency.
Other key indicators also matter. These include GDP, Manufacturing and Services PMIs, labor data, and consumer sentiment. Strong data often supports the Euro, while weak data tends to weigh on it.
The largest Eurozone economies—Germany, France, Italy, and Spain—are especially important. Together, they account for about 75% of total Eurozone output.
Trade Balance as a Driver of Currency Performance
The Trade Balance measures the difference between exports and imports. A surplus occurs when exports exceed imports. This usually strengthens the currency because foreign buyers must purchase it to pay for goods.
In contrast, a deficit occurs when imports exceed exports. This can weaken the currency because it signals higher demand for foreign goods and currency outflows.
TradingPedia.com is a financial media specialized in providing daily news and education covering Forex, equities and commodities. Our academies for traders cover 
