Euro steadies as the US Dollar eases, but hawkish Fed bets limit upside

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EUR/USD stages a rebound on Friday as a pullback in the US Dollar (USD) helps the Euro recover after recent losses. At the time of writing, the pair trades around 1.1470 after bouncing from a three-month low of 1.1417 touched earlier in the day.

EUR/USD rebounds from a three-month low as the US Dollar retreats from one-year highs.
Renewed Fed rate-hike bets keep the Greenback supported despite easing geopolitical tensions.
Hawkish ECB rhetoric and last week's 25 bps rate hike provide little support to the Euro.

The US Dollar Index (DXY) eases after Reuters reported that Israel and Hezbollah had agreed to a ceasefire, one of Iran's key demands under the 60-day MoU reached earlier this week. In the meantime

The DXY, which tracks the Greenback's value against a basket of six major currencies, trades around 100.81 after touching 101.13 earlier in the day, its highest level since May 2025.

Despite easing geopolitical tensions, the US Dollar remains underpinned by renewed hawkish repricing of US interest rates, leaving EUR/USD on track to end the week in negative territory.

Earlier this week, the Federal Reserve (Fed) left its policy rate unchanged at 3.50%-3.75% but signaled that interest rate hikes remain on the table as policymakers seek to restore inflation to their 2% target following a recent pickup in price pressure driven by higher Oil prices.

Meanwhile, hawkish signals from the European Central Bank (ECB) following last week's 25 basis-point rate hike have failed to provide meaningful support to the Euro.

ECB policymaker Pierre Wunsch said on Friday that "if data is not going in the right direction, I would plead for a second hike in July." He added that "if we see higher services inflation, we may want to hike another 25 bps to be on the safe side," but noted that the ECB could cut rates "when the dynamics turn."

Analysts at Nordea said they see "limited upside for EUR/USD in the near term, as the ECB is likely closer to the end of its hiking cycle than the Fed and growth in the euro area continues to lag behind the US." They added that their "baseline is for EUR/USD to trade broadly sideways over the next few months, before gradually moving higher as US exceptionalism fades and the Fed eventually starts to cut rates ahead of the ECB."

Looking ahead, traders will focus on preliminary Purchasing Managers Index (PMI) data from both the Eurozone and the United States next week, along with the US Personal Consumption Expenditures (PCE) Price Index.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.