The euro fell even as the European Central Bank delivered its first deposit-rate rise since 2023, with EUR/USD dropping to a multi-week low near 1.1400 before stabilising around 1.1450. The move came as the ECB raised rates while cutting growth forecasts and increasing inflation projections, as euro-area inflation climbed to its highest in nearly three years on energy costs linked to disruption through the Strait of Hormuz, even as the bloc’s economy contracted in the first quarter. German Bund yields showed little reaction, as the ECB paired the increase with guidance that implied no preset path.
Across the Atlantic, the Federal Reserve held at 3.75% and lifted its dot plot, while the US Dollar Index sat at a 13-month high. Technically, a bounce has pushed the hourly Stochastic RSI into overbought territory, leaving room for a move towards 1.1500 and then 1.1550, but the daily chart remains below the 50-day and 200-day EMA near 1.1600. Markets are also watching the flash PMI on Tuesday and, at 12:30 GMT next Thursday, the third estimate of first-quarter GDP alongside May PCE. Key support sits at 1.1450, then 1.1400.
Stagflation Risks and Euro Vulnerability
The recent European Central Bank rate hike is not a signal to buy the Euro; we see it as a trap. This is a defensive move against persistent inflation, which recent data confirms is stubbornly high at 2.9%, driven by ongoing energy supply issues. The hike came alongside cuts to growth forecasts, telling us the Eurozone is grappling with stagflation.
The Federal Reserve offers a much clearer picture, holding rates high while the US economy shows superior strength. First-quarter GDP growth at 1.8% far outpaces the Eurozone’s 0.2% contraction in the same period. With US inflation, measured by the Personal Consumption Expenditures index, expected to remain elevated near 3.1%, the Dollar has a fundamental advantage over the Euro.
Trading Strategy and Key Events
Given this divergence, we are looking at strategies that benefit from a falling or stagnant EUR/USD exchange rate. Buying put options with strike prices below 1.1400 could be a direct way to position for the next leg down. Alternatively, selling call spreads above the 1.1550 resistance level allows us to profit if the Euro fails to rally meaningfully from here.
We should treat any short-term bounce toward the 1.1500 area with heavy skepticism. Such a move would likely be a corrective technical rally, not a change in the underlying weak trend. This presents a better opportunity for us to initiate bearish positions at more favorable levels rather than a reason to turn bullish.
The key event to watch is next Thursday’s US PCE inflation report. A hot number will reinforce the Fed’s hawkish stance and likely send EUR/USD back toward its lows near 1.1400. We are watching this release as the likely trigger to add to our bearish exposure on the Euro.
