EUR/USD stayed rangebound after the weekend’s deal headlines, with Tuesday’s dip holding above 1.1550 before the pair ground back to 1.1600 and stalled beneath the 200-day EMA just overhead. The ECB has already tightened, raising rates last Thursday for the first time since 2023 and taking the deposit rate to 2.25% after eight consecutive cuts, while core inflation remains near 2.5%. German investor expectations turned positive for the first time since winter even as current conditions stayed deeply negative, and some desks now look to September for a possible further move.
Attention shifts to Wednesday’s first decision under Fed Chair Kevin Warsh, with the FOMC widely expected to hold the 3.50% to 3.75% range; focus is on the SEP and whether it is de-emphasised. US CPI is running at 4.2% and markets price roughly 60% odds of a December hike, while no cut is priced through 2027. The energy shock that pushed Crude Oil towards $120 has reversed after a US-Iran framework agreement reopened the Strait of Hormuz, pulling oil back towards $80 and sending the Dollar to a 10-day low. Final May HICP is due 09:00 GMT, US Retail Sales at 12:30 GMT, then the Fed decision at 18:00 GMT and press conference at 18:30 GMT; resistance sits above 1.1600 then 1.1650 and 1.1700, while support is 1.1550 then 1.1500 and the early-June lows.
EUR/USD Outlook and Policy Divergence
We see the EUR/USD exchange rate as coiled for a potential move higher, even as it struggles below the 1.1600 handle. The European Central Bank has already delivered a hawkish rate hike, while the justification for the Federal Reserve to do the same is literally evaporating with falling oil prices. This policy divergence is not yet reflected in the price, creating an opportunity for us in the coming weeks.
To position for a bullish breakout, we should consider buying short-dated EUR/USD call options. Targeting strikes like 1.1650 or 1.1700 with expirations in early July allows us to capitalize on a dovish tone from the new Fed Chair this Wednesday. This approach clearly defines our maximum risk to the premium paid, which is crucial given the uncertainty of a new Chair’s first press conference.
Strategy, Risk Management, and ECB Tailwind
The 33% collapse in crude oil prices from $120 to near $80 a barrel in just over a week is a massive disinflationary signal. One-week implied volatility in the pair has risen to over 8%, showing the market is nervous, but we believe it is mispricing the risk of a Fed that acknowledges this new reality. Historically, such sharp energy price drops, like the one in late 2014, have forced central banks to pivot, leading to sustained currency trends.
As a risk management tactic, using a bull call spread by buying a 1.1600 call and selling a 1.1700 call can lower our entry cost. This would still profit from a move higher but with a capped upside, offering a more conservative play on our bullish thesis. A daily close below the 1.1550 support level after the Fed meeting would be our signal to reconsider this view, as it would suggest the Dollar’s strength is more resilient than anticipated.
Looking past this week, our focus will shift to confirming data that supports continued ECB hawkishness. Eurozone’s final HICP inflation figures for May are expected to confirm core inflation remains stubbornly high around 2.5%, giving the ECB every reason to signal another hike. This ongoing rate advantage for the Euro should provide a steady tailwind for the currency pair through the summer.
