The EUR/USD exchange rate fell by 0.38% during the North American session. This drop was due to U.S. economic data affecting expectations for interest rate cuts by the Federal Reserve. The pair traded at 1.1598, after reaching a high of 1.1642 earlier. Market sentiment improved after U.S. President Trump dismissed rumors about firing Federal Reserve Chair Jerome Powell. Strong U.S. economic data, including a solid labor market and rising Retail Sales, supports the current Federal Reserve policies, with CPI data showing inflation approaching 3%. Initial Jobless Claims for the previous week were lower than expected, and Retail Sales exceeded forecasts for June. However, there are worries that rising prices for goods and services are affecting these figures. Inflation in the Eurozone remains closer to the 2% target.

Economic Indicators Focus

This week, the Euro will pay close attention to Germany’s Producer Price Index. Meanwhile, the U.S. will focus on the University of Michigan Consumer Sentiment report and several Fed speeches. The EUR/USD has struggled to move strongly in either direction, with technical indicators showing that sellers are gaining strength. The European Central Bank (ECB), which manages monetary policy in the Eurozone, primarily aims to keep prices stable. The ECB may use Quantitative Easing to influence the Euro’s value during economic changes, targeting stable inflation around 2%. The growing difference between U.S. and Eurozone monetary policies suggests a clear trend. With the U.S. economy still strong, the Federal Reserve is likely to keep interest rates high for longer. This contrasts with the Eurozone situation and creates opportunities for the EUR/USD pair.

Recent Monetary Policy Movements

Recent data supports this perspective. The U.S. added an impressive 272,000 jobs in May, well above expectations, indicating a tight labor market. U.S. inflation, measured by the Consumer Price Index, is currently at 3.3% annually, significantly above the central bank’s target. The Fed chairman recently emphasized a cautious, data-driven approach, indicating there is no immediate plan to cut rates. In Europe, the European Central Bank has started its easing cycle, cutting its key interest rate by 25 basis points this month for the first time since 2019. Eurozone inflation has recently risen to 2.6%, but the ECB’s willingness to cut rates first increases the interest rate gap in favor of the dollar. This highlights a different economic situation and policy outlook compared to the U.S. Given these factors, we believe it’s wise to prepare for further weakness in the EUR/USD in the coming weeks. We plan to buy put options on the EUR/USD to profit from a decline while limiting our potential loss to the premium paid. This strategy takes advantage of the increasing pressure from sellers noted in the technical indicators. This situation is similar to the 2014-2016 period when differing policies led to a prolonged downtrend in the currency pair. Back then, the ECB’s easing measures against a tightening Fed caused the EUR/USD to drop by over 20%. History shows that when these central banks move in opposite directions, the resulting trend can be strong and lasting. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now