The EUR/USD dropped below 1.2000, falling by more than 0.60% after the Federal Reserve decided to keep interest rates unchanged. Currently, the exchange rate is at 1.1955, as Fed Chair Jerome Powell took a neutral view on monetary policy. The Federal Reserve expressed patience regarding the economy, citing improvements in the labor market and ongoing inflation concerns. Core PCE inflation might reach about 3%, with price increases expected to peak around mid-year.

Consumer Confidence and ECB Concerns

In Germany, consumer confidence has improved, but the European Central Bank is worried about how a weaker US Dollar might affect inflation. Meanwhile, the US Dollar Index increased by 0.55% to 96.34. At the recent Federal Reserve meeting, interest rates stayed at 3.50%–3.75% after a split vote. Officials noted that inflation remains “somewhat elevated” and that economic uncertainty continues, which will influence future decisions based on the dual mandate. The EUR/USD has retreated from recent highs and is stabilizing near 1.1950, with possible further changes depending on Federal Reserve actions. Decisions from the Fed’s eight annual meetings greatly influence the US Dollar, with quantitative easing and tightening altering its value and attractiveness internationally. Reflecting on this period in 2025, the Federal Reserve’s firm approach pushed the EUR/USD below the 1.2000 mark. Now, as the pair trades closer to 1.1500, we see a shift as last year’s tightening impacts become evident. Recent reports indicate US inflation has dropped to 2.8%, its first reading below 3% in over eighteen months, suggesting the end of the rate-hiking cycle.

Shifting Monetary Policy Dynamics

Last year’s focus for the Fed was on stabilizing labor conditions. Today, however, the emphasis has shifted to a cooling market. With the Fed funds rate at 4.25%, discussions are now regarding when the first rate cuts will happen. The latest jobs report revealed an uptick in the unemployment rate to 4.1%, prompting traders to anticipate a policy change before summer. A year ago, European Central Bank officials were concerned about a strong euro, but the dollar’s recent rally has changed that. Now, ECB policymakers sound more hawkish than the Fed, as Eurozone core inflation remains above their target. Derivative markets expect 75 basis points of cuts from the Fed in 2026, while only 25 basis points are anticipated from the ECB. In the upcoming weeks, this growing policy difference suggests a possible strengthening of the euro against the dollar. We might consider using options to trade a move back towards the 1.1750 resistance level, such as buying call options or setting up bull call spreads. Implied volatility is likely to rise before the next FOMC meeting, so taking positions beforehand could be advantageous. Create your live VT Markets account and start trading now.

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