May 2025 lows remain close as Euro struggles and Fed hawks underpin Dollar

May 2025 lows remain in sight for EUR/USD as sustained US Dollar strength keeps the pair under pressure.
Despite pressure from US jobless claims exceeding forecasts, hawkish Fed expectations cushion the Greenback’s decline.
Persistent worries over Eurozone growth leave ECB rate hike expectations providing little support.

EUR/USD stands near 1.1087 at the time of writing. The pair is little changed in Thursday’s American session, recovering from an intraday low of 1.1066, its weakest since May 2025. The US Dollar (USD) has surrendered some gains after setting a fresh year-to-date high.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

US Initial Jobless Claims climbed to 200K from the previous week’s 191K, exceeding the 195K forecast and curbing the Greenback’s momentum. The four-week average was unchanged at 195.25K. Having touched 103.08 earlier in the session, the US Dollar Index (DXY) now trades near 102.95.

Increasing calls from Federal Reserve (Fed) officials for additional rate increases to contain inflation continue to underpin the Greenback. On Thursday, Cleveland Fed President Beth Hammack said monetary policy must become restrictive, noting that higher energy costs are feeding into other prices. Smaller adjustments cause less economic disruption, she said, but a larger increase could be necessary if the Fed falls behind.

Support for further tightening also came earlier this week from Dallas Fed President Lorie Logan and Philadelphia Fed President Anna Paulson. Before Tuesday’s inflation release, Fed Governor Christopher Waller said a monthly core reading of around 0.3% could make a half-point December increase an option.

With core inflation reported at 0.3%, traders have fully priced in a December rate increase. The preferred outcome remains a 25-basis-point (bps) hike, although markets assign a small probability to a larger 50 bps move. Further Fed rate increases are also expected into 2027.

Friday’s US Producer Price Index (PPI) is the next inflation release on traders’ radar. Risks from energy-led price pressures remain prominent after US President Donald Trump said on Truth Social that the US does not need an agreement with Iran.

25 bps ECB hike expected as caution clouds Euro outlook against Fed tightening

All 71 economists in a Reuters poll released on Thursday forecast a 25 bps December increase in the European Central Bank’s (ECB) deposit rate to 2.75%. For 46 respondents, that would mark the cycle’s final hike. The other 25 anticipate a further increase, most likely during the first quarter of 2027.

Rabobank strategists place the ECB “among those banks also likely to tighten policy,” noting that “the Fed is not the only G10 central bank widely expected to hike rates in December,”. Their caution is that “the ECB, however, could prove to be reluctant to hike rates beyond December,” citing indications from “the last ECB press conference” which “suggested that the GC were becoming increasingly concerned about the growth outlook.”

Rabobank’s house assessment is that “market pricing for 2027 ECB rate rises remains too aggressive,” while its strategists also warn that “another factor that could weigh on the EUR in the coming months are uncertainties about what a far-right president in France could mean for EU cooperation going forward.”

Fed: key questions answered

How do the Federal Reserve’s responsibilities affect the US Dollar?

Responsibility for US monetary policy rests with the Federal Reserve (Fed), whose dual mandate covers stable prices and full employment. Adjusting interest rates is its main means of pursuing those objectives. If prices climb too rapidly and inflation exceeds the Fed’s 2% target, the central bank increases rates. Higher borrowing costs across the economy make the US more attractive to international investors seeking to place funds, strengthening the US Dollar (USD). Conversely, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut rates to stimulate borrowing. That puts downward pressure on the Greenback.

What is the Fed’s monetary policy meeting schedule?

Eight times a year, the Federal Reserve (Fed) convenes policy meetings at which the Federal Open Market Committee (FOMC) reviews economic conditions and decides monetary policy. Twelve Fed officials attend the FOMC: the seven Board of Governors members, the president of the Federal Reserve Bank of New York and four presidents drawn from the remaining eleven regional Reserve Banks. Those four serve rotating one-year terms.

How does Quantitative Easing (QE) work, and what does it mean for USD?

When conditions become extreme, the Federal Reserve may turn to Quantitative Easing (QE) to substantially expand credit flows through a stalled financial system. Reserved for crises or periods of exceptionally low inflation, this unconventional measure was the Fed’s preferred response during the Great Financial Crisis in 2008. Under QE, the Fed prints additional Dollars to purchase high-grade bonds from financial institutions. The policy generally weakens the US Dollar.

How does Quantitative Tightening (QT) work, and what does it mean for the US Dollar?

By reversing QE, Quantitative Tightening (QT) typically supports the US Dollar’s value. The Federal Reserve ceases bond purchases from financial institutions and, when bonds in its portfolio mature, does not reinvest the principal in new bonds.