The Euro has weakened against the US Dollar, dropping to 1.1935 as the Dollar recovers before the Federal Reserve’s interest rate decision. Many expect the Fed to make two rate cuts later this year. At the same time, ECB officials are worried that a strong Euro could impact Eurozone monetary policy. Support for the Dollar comes from US officials. Treasury Secretary Scott Bessent has reaffirmed a strong dollar policy. President Trump has also commented on the decline of the Dollar, suggesting it should find its rightful level without help.

Expected Rate Decision

The Fed is likely to keep rates between 3.75% and 3.50% after previous cuts due to concerns in the labor market. While recent data shows the US labor market is stable, inflation remains above the Fed’s target, even as it moderates. Chair Powell’s comments will be significant as markets expect possible cuts later this year. President Trump intends to appoint a new Fed Chair, with candidates like Rick Rieder and Christopher Waller. ECB member François Villeroy de Galhau is examining how the Euro’s rise impacts inflation, which could influence future interest rate decisions. Currently, the US Dollar is strongest against the Swiss Franc and weakest against the Japanese Yen, with percentage changes shown in the currency heatmap. Looking back to 2025, there was concern about the EUR/USD exchange rate approaching 1.2000. At that time, the market was factoring in Fed cuts, while the ECB worried that a strong Euro could hurt inflation. This created a classic standoff between the two central banks.

Policy Divergence

Things have changed since those anticipated Fed cuts took place in the second half of last year. However, recent US data shows inflation remains persistent, with the latest Consumer Price Index (CPI) at 2.5%. Meanwhile, weekly jobless claims are close to multi-decade lows. This strong economic outlook raises doubts about whether the Fed’s easing cycle has ended. On the other hand, the ECB’s concerns are proving valid, as Eurozone inflation is currently at just 1.8%, significantly trailing the US. This difference in economic performance is causing a clear policy divide between a possibly paused Fed and a still-dovish ECB. As a result, the EUR/USD has fallen and is now trading closer to the 1.15 mark, reflecting this new reality. In the coming weeks, this growing policy gap suggests we may see more currency volatility. Derivative traders could explore strategies like long straddles or strangles on EUR/USD, which can profit from significant price moves in either direction, regardless of which central bank surprises the market first. The current implied volatility on one-month options is around 6.8%, which may seem low if a policy shock happens. With stronger US economic data, the Dollar shows a clear advantage over the Euro. It may be wise to bet on further declines in EUR/USD by purchasing put options or implementing put spreads to keep costs down. These strategies stand to gain if the pair falls below key support levels from late 2025. The upcoming US non-farm payroll and inflation reports are key events to monitor. A strong performance in either may lead the market to believe that the Fed will hold rates steady, further pressuring the EUR/USD down. However, any weak data could revive hopes for easing and spark a sharp turnaround. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now