EUR/USD held modest intraday gains in the first half of the European session but failed to attract follow-through demand, staying near a one-week low set earlier on Thursday. The pair traded above 1.1600, up just over 0.10% on the day, as a softer US Dollar weighed after an overnight rise to its highest level since 7 April. A truce between Israel and Lebanon reduced safe-haven demand for the Greenback and encouraged profit-taking.
The euro found support from firmer market pricing for a European Central Bank rate hike later this month. At the same time, tensions between the US and Iran over issues including Tehran’s nuclear programme and the Strait of Hormuz, plus renewed Middle East hostilities and the absence of progress in diplomatic talks, kept geopolitical risk elevated. That backdrop, combined with hawkish Federal Reserve expectations, limited the dollar’s downside and restrained EUR/USD.
Higher oil prices have sustained inflation concerns and reinforced bets for higher US borrowing costs by year-end, discouraging aggressive bearish positioning in USD. Attention turns to US Weekly Initial Jobless Claims and remarks from FOMC members, though the key near-term release is Friday’s US Nonfarm Payrolls report.
Central Bank Divergence And Geopolitical Themes Keep EUR/USD Range-Bound
We are seeing the EUR/USD struggle to gain any real traction, hovering just above the 1.1050 mark today. The primary driver remains the divergence between central bank expectations. While the market has priced in the Federal Reserve holding rates steady, the European Central Bank is signaling a potential cut before year-end.
Renewed geopolitical tensions are providing a floor for the US Dollar, limiting any significant EUR/USD advance. Recent reports of shipping disruptions near the Strait of Hormuz have pushed Brent crude back towards $95 a barrel, bolstering the dollar’s safe-haven appeal. This situation reminds us of past volatility, where geopolitical flare-ups have consistently led to a flight to quality.
The Fed’s cautious stance is being reinforced by stubbornly persistent inflation, with the last US CPI report for May coming in at 3.1%, slightly above expectations. As a result, all eyes are on tomorrow’s Nonfarm Payrolls report for further clues on the economy’s strength. A strong jobs number would almost certainly take a 2026 Fed rate cut off the table and strengthen the dollar.
In contrast, the Eurozone is showing signs of economic fatigue, evidenced by Germany’s latest industrial production figures which posted a surprise 0.5% contraction last month. This weakness supports our view that ECB officials will be more inclined to ease policy to stimulate growth. This growing policy gap between a firm Fed and a softening ECB is the key theme for the coming weeks.
Positioning For A Stronger Dollar As Policy Gap Widens
Given this backdrop, we believe any rallies in EUR/USD towards the 1.1100 resistance level are opportunities to initiate bearish positions. For derivative traders, selling out-of-the-money call options or establishing bear call spreads on the pair could be a prudent way to capitalize on the expected capped upside. This strategy allows us to profit from range-bound trading while defining our risk ahead of key data releases.
We have seen this pattern before, particularly during the 2022-2023 period when the Fed’s aggressive rate-hike cycle created a powerful dollar rally. That historical precedent shows that when policy paths between the US and Europe diverge this sharply, the dollar tends to outperform. We are positioning for a similar, though less dramatic, dynamic to play out through the summer.
