The Euro is falling as the US Dollar gets stronger, largely due to the Federal Reserve’s actions. Positive economic data from the US suggests that high interest rates may last longer. The EUR/USD pair is facing pressure, but hopes for a possible US-EU trade deal are limiting the Euro’s losses. The Euro started lower in the US trading session, even after gaining 0.8% for the week.

European Central Bank Announcement

The European Central Bank (ECB) hinted at keeping interest rates steady for a while. President Christine Lagarde expressed confidence in economic growth. However, data from the Eurozone didn’t help the Euro. The US IFO Business Climate Index showed slight improvement, but expectations for the economy remained unchanged. In contrast, US business activity surpassed expectations. The services sector saw significant growth, and Initial Jobless Claims dropped, boosting the US Dollar’s recovery. Overall, the Euro is on track for a solid week, fueled by optimism surrounding a trade deal with the US. The German IFO Business Climate Index ticked up slightly on Friday.

Bears Driving The EUR/USD Pair

The EUR/USD pair is under increasing bearish pressure. Technical indicators show a downward trend, with support around the 1.1715 level being tested. The Federal Reserve aims for price stability and full employment when setting US monetary policy. Interest rates are adjusted in response to inflation and unemployment data. The Fed uses Quantitative Easing (QE) and Quantitative Tightening (QT) during financial crises. QE can weaken the Dollar, while QT generally strengthens it. Given the strong US Dollar, we think the EUR/USD pair will likely continue to fall. The recent US inflation report showed a rate of 3.4% for April 2024, which supports the Fed’s decision to keep interest rates high for a longer period. This difference in policies is expected to further pressure the Euro. Strategies that benefit from a decline in the Euro’s value against the Dollar should be considered. With the ECB possibly signaling a rate cut as early as June—contrasting sharply with the Fed’s position—the case for a weaker Euro is strong. Last week, US initial jobless claims were a modest 222,000, showing ongoing strength in the labor market and supporting the Dollar. Ms. Lagarde’s optimistic comments do not overshadow the data indicating a slowing Eurozone economy. The market has largely anticipated an ECB rate cut, making the Dollar—with its higher yield—more appealing to investors. Historically, when central banks diverge in monetary policy, significant currency trends occur. For example, between mid-2014 and early 2015, as the Fed ended its QE and the ECB expanded its bond buying, the EUR/USD fell by more than 20%. We might be entering a similar phase where sustained Dollar strength prevails for months. From a technical perspective, the EUR/USD pair is facing strong resistance near the 1.0900 level. We see a chance to buy put options with strike prices below the current support around 1.0800. This strategy offers a clear, defined way to potentially profit as the pair moves down toward the 1.0725 area. The ongoing QT from the Federal Reserve is also a steady boost for the Dollar. By reducing its balance sheet, the Fed is systematically removing liquidity from the financial system, which generally supports a stronger currency long-term. While hopes for a US-EU trade deal may provide temporary support for the Euro, we see any resulting rallies as chances to initiate or increase bearish positions. The macroeconomic outlook and monetary policy remain the main drivers. Create your live VT Markets account and start trading now.

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