EUR/USD trades near 1.1740 on Monday, up 0.21% on the day, extending Friday’s rebound from around 1.1670. The pair rises even as the Eurozone macro backdrop appears weaker.
Germany’s GfK consumer confidence index falls to -33.3 in May from -28.1, the lowest level in more than three years and below expectations. The Euro shows limited reaction as attention shifts to factors outside the Eurozone.
Dollar Demand And Middle East Risks
Middle East developments are affecting demand for the US Dollar, with reports of a new proposal from Tehran that includes reopening the Strait of Hormuz. Talks remain stalled, while supply risks keep crude prices near $100 per barrel, which may weigh on global growth.
The US Dollar Index (DXY) is falling, reflecting broad weakness in the currency. This comes as markets expect the Federal Reserve to keep rates unchanged in the near term, with the chance of a more dovish tone later.
Focus now turns to central bank decisions, with the Fed due on Wednesday and the European Central Bank on Thursday. The ECB is also expected to keep rates steady, but it may point to future tightening due to inflation pressures linked to energy prices.
A year ago, in April 2025, we saw EUR/USD holding strong around 1.1740, largely due to a softer US Dollar amid hopes for a dovish Fed. Despite concerning German consumer confidence data, the market’s focus was on geopolitics and the possibility of a hawkish turn from the European Central Bank. The landscape today is markedly different, and our strategies must adapt accordingly.
Policy Divergence And Trading Approach
The European Central Bank did deliver that firm message in mid-2025, but the subsequent rate hikes have significantly slowed the Eurozone economy. We now see headline inflation down to 2.5%, prompting discussions of rate cuts by the third quarter of this year. This contrasts sharply with the US, where a resilient labor market and stickier inflation at 3.1% keep the Fed firmly on hold.
With the pair now trading near 1.0750, a full ten cents lower than in April 2025, the primary play for us is the policy divergence between the two central banks. Three-month implied volatility has risen to 7.5%, suggesting traders are pricing in larger-than-usual moves around upcoming policy meetings. We see value in buying long-dated puts on EUR/USD to hedge against or speculate on a further decline driven by the ECB cutting rates before the Fed.
The geopolitical risks that kept oil near $100 per barrel in early 2025 have since subsided, with crude oil now trading closer to $85. This has eased some pressure on the European economy but has not been enough to alter the underlying weak growth narrative. Therefore, we should also consider strategies that benefit from a low-growth, low-volatility environment in Europe, such as selling covered calls against long Euro positions in other crosses.
