EUR/USD fell from 1.18 to 1.16 but then began to lose downward momentum, even as rates and equity markets moved into risk-off conditions and the SG Sentiment Indicator declined.
The report links this to a bearish view on the US dollar and to markets continuing to price multiple policy moves, including a decent chance of a Fed hike this year.
Rate Expectations Supporting The Euro
It says the front end of the US rates curve still prices in 3 ECB hikes and 2 ½ Bank of England hikes, which may be supporting the euro despite weaker sentiment.
It adds that EUR/USD may not move into a clearer trend until rate expectations change, such as if European rate hike pricing is challenged or if the FOMC minutes lead to a reassessment of the US policy path.
It also notes that futures markets are again reducing long USD positions, which may slow any dollar gains. The piece states it was produced with the help of an AI tool and reviewed by an editor.
We recall a similar sentiment from a few years back, around 2018, when EUR/USD held stubbornly around 1.16 despite a gloomy outlook. This was largely because markets were still pricing in several European Central Bank (ECB) hikes, a stark contrast to today’s environment. As of May 18, 2026, with the pair trading near 1.08, the debate centers on the timing and pace of ECB rate cuts, not hikes.
Trading Implications In Todays Environment
The old analysis hinged on rate expectations moving before the currency could, and that is precisely what we have seen play out over the years. The interest rate gap has widened significantly, with the Fed funds rate holding at a 5.25-5.50% target range while the ECB’s deposit facility rate is at 4.00%. With recent U.S. inflation data still showing a 3.4% annual increase, the Federal Reserve is staying put while the ECB has all but confirmed a rate cut for its June meeting.
This divergence is now reflected clearly in the futures market, where recent CFTC data shows that speculative net long positions in the Euro have been consistently reduced. For derivative traders, this points toward strategies that anticipate further downside or, at the very least, a cap on any rallies. Therefore, buying EUR/USD put options or establishing bear call spreads to profit from a potential drop towards 1.07 seems like a prudent response in the coming weeks.
