EUR/USD fell for a sixth straight session, trading near 1.1620 in Asian hours on Monday, as the US Dollar strengthened on expectations of tighter US monetary policy. Several Federal Reserve officials said inflation control remains the priority, and markets raised the implied chance of a December rate rise to nearly 48% from 14% a week earlier, based on the CME FedWatch tool.
The Dollar also drew support from demand for safer assets amid ongoing geopolitical tensions. The US and Iran remained far from an agreement to end weeks of fighting and reopen the Strait of Hormuz, while warnings over Taiwan added to wider risk aversion.
The fall in EUR/USD may be limited by expectations of a firmer European Central Bank stance. A Reuters poll reported that 85% of economists expected the ECB to raise the deposit rate by 25 basis points to 2.25% in June, compared with just over half before the April meeting.
The Euro is used by 20 EU countries and in 2022 accounted for 31% of global foreign exchange transactions, averaging over $2.2 trillion daily. EUR/USD makes up about 30% of all FX trades, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
We see the EUR/USD pair remains under pressure, reflecting a broader theme of dollar strength driven by global risk aversion and central bank policy differences. The pair’s struggle below 1.1650 suggests that traders are pricing in continued uncertainty. This environment requires a careful look at how monetary policies and geopolitical risks are evolving.
The view on the Federal Reserve has shifted significantly from the aggressive stance we saw for much of 2025. With the latest US CPI data for April 2026 coming in at 2.9%, the CME FedWatch Tool now indicates only a 15% probability of a rate hike by the end of the year. This is a notable pivot from the persistent rate-hike fears that previously fueled the dollar’s rally.
Across the Atlantic, inflation appears stickier, with the latest Eurozone HICP data showing a 3.2% annual increase. This persistent price pressure keeps the European Central Bank in a hawkish position, supporting the idea of a potential rate hike to defend the euro. This growing policy divergence, where the Fed may be done hiking while the ECB is not, is a central theme for us.
Geopolitical risks continue to favor the US dollar as a safe-haven asset, even if tensions have slightly moderated since last year. Brent crude oil prices are holding firm around $95 a barrel, reflecting ongoing shipping concerns in the Strait of Hormuz. This sustained high energy cost weighs more heavily on the Eurozone, an energy importer, than on the more self-sufficient US economy.
Given this complex backdrop, we should anticipate continued volatility in the coming weeks. For derivative traders, this suggests that strategies profiting from price swings, such as long straddles, could be advantageous. Implied volatility on EUR/USD 3-month options has already climbed to 8.5%, showing that the market is bracing for movement.
For those with a directional bias, buying put options on the EUR/USD offers a hedge against further downside if geopolitical risks flare up or if the Fed signals a surprise return to hawkishness. Conversely, call options could be a measured way to position for a euro rebound if the ECB acts decisively while the Fed remains on hold. Watching the key economic data out of both Germany and the US will be critical for timing these trades.
