The euro stayed close to a three-month low against the US dollar on Monday, with EUR/USD around 1.1498 as expectations of a hawkish Federal Reserve continued to support the greenback. This came even as easing Middle East tensions reduced safe-haven demand. The US Dollar Index (DXY) traded near 101.00, close to a thirteen-month high, while the Fed reiterated its aim of returning inflation to the 2% target after recent price pressures linked to an energy shock.
Diplomatic developments offered little relief for the single currency. The first face-to-face US-Iran talks ended in Switzerland with Pakistan and Qatar mediating, and the parties agreed a roadmap to a final deal within 60 days while continuing technical talks through the week. In Europe, the European Central Bank has raised rates by 25 basis points this month as it weighs inflation against weaker growth, and policymakers flagged uncertainty around the Iran shock. Attention turns to ECB speeches, preliminary global PMI releases, the US PCE Price Index, and the final estimate of first-quarter US GDP.
Policy Divergence Keeps Pressure on the Euro
We see the Euro continuing to struggle against the dollar, driven primarily by the policy gap between a hawkish Federal Reserve and a more cautious European Central Bank. The market is prioritizing interest rate differentials over other factors, creating a clear trend. This suggests the path of least resistance for EUR/USD remains to the downside in the near term.
The Fed’s firm stance is backed by recent data, with the latest Core Personal Consumption Expenditures (PCE) index holding stubbornly at 2.9% year-over-year. Conversely, the Eurozone’s inflation has cooled to 2.5%, giving the ECB justification for its agile but less aggressive approach. This fundamental economic divergence continues to fuel US dollar strength.
Market Positioning and Outlook
Given this environment, we are looking at strategies that benefit from a stronger dollar and a weaker euro. The options market shows one-month implied volatility for EUR/USD has risen to around 8.5%, indicating traders anticipate price swings around this week’s key data releases. This makes buying EUR/USD put options an attractive way to position for a potential move lower, especially with the US GDP and PCE reports on the horizon.
Even positive geopolitical developments, such as the progress in US-Iran negotiations, are failing to dent the dollar’s appeal. This reminds us of the dynamic seen during the 2022-2023 rate hiking cycle, where Fed policy dominated all other market narratives. Until we see a significant shift in communication from either the Fed or the ECB, we expect this pattern to persist.
