EUR/USD dropped after hitting a two-week high on Thursday. This was due to the European Central Bank (ECB) deciding to keep interest rates unchanged. Meanwhile, the US Dollar gained strength from strong economic data and optimism around trade, as President Trump mentioned a “50-50 chance” of reaching a trade deal with the EU. On Friday, the Euro fell against the US Dollar, influenced by strong US economic reports and positive trade news. The EUR/USD pair traded lower during US hours, moving away from its prior two-week high but still up almost 0.80% for the week.

Trade Agreement Speculation

The US Dollar Index has seen a slight recovery, approaching 97.80 after being near a two-week low. There are reports of a possible trade agreement between the US and EU, similar to the US-Japan deal which includes a 15% tariff cap on important goods, though nothing is official yet. ECB policymaker François Villeroy de Galhau expressed concerns about trade tensions. He indicated that the ECB may consider adjusting interest rates in the future and supports a flexible monetary policy due to uncertain global conditions. Today, the Euro increased the most against the British Pound. The US Dollar rose 0.12% against the Euro, while the Euro dropped 0.55% against the British Pound. We view the Euro’s recent two-week peak as a chance to sell rather than a sign of lasting strength. The contrast between a strong US economy and a cautious ECB suggests downward pressure on the EUR/USD pair. This sets a clear strategy for traders in the weeks ahead.

Currency Strategy and Historical Context

The strength of the dollar is backed by solid data. Recent reports show US weekly jobless claims around 212,000, indicating a healthy labor market. This robustness makes it unlikely that the Federal Reserve will cut interest rates soon. We believe this difference in policy will continue to support the US currency. Conversely, comments from officials like Villeroy highlight significant risks for the Eurozone economy. April’s Eurozone inflation stood at 2.4%, close to the ECB’s target but showing easing underlying pressures. His caution about potential future rate changes suggests a weaker Euro ahead. Given this outlook, we are planning for a decline in the EUR/USD by buying put options. This method allows us to make a profit if the pair falls while limiting our maximum loss to the premium paid. With market volatility remaining relatively low, the cost of these options is appealing. Historical trends back this perspective. A similar divergence in central bank policies occurred from 2014 to 2015, causing the EUR/USD to drop from about 1.40 to nearly 1.05. The current situation—with a hawkish Fed and a dovish ECB—mirrors that period. Furthermore, President Trump’s optimism about a trade agreement clouds the Euro’s prospects, as any agreement could limit its potential for growth. Create your live VT Markets account and start trading now.

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