The EUR/USD pair remains under pressure following stronger-than-expected U.S. inflation data. Markets have sharply revised expectations regarding Federal Reserve policy: while investors were anticipating rate cuts earlier this month, discussions are now emerging around the possibility of another rate hike in 2026.
April inflation in the U.S. accelerated to 3.8%, boosting demand for the dollar and pushing U.S. Treasury yields higher.
Euro holds ground on ECB expectations
Despite pressure from the stronger dollar, the euro has so far avoided a sharp decline. Markets continue to price in the possibility of a more cautious and relatively hawkish stance from the European Central Bank amid persistent inflation in the eurozone and elevated energy prices. Additional support for the euro comes from expectations that the ECB may slow the pace of future easing, especially if oil prices continue rising due to geopolitical tensions in the Middle East.
Geopolitics and oil remain key drivers
One of the major drivers of the FX market remains the Middle East conflict and the ongoing rise in oil prices. Higher energy costs are fueling inflationary pressures globally, while the U.S. economy continues to show greater resilience compared to Europe. This imbalance continues to support the dollar as a safe-haven asset. Analysts at Morgan Stanley and Bank of America note that markets are increasingly shifting toward a “higher for longer” scenario, where the Fed keeps interest rates elevated for an extended period.
Technical outlook and near-term scenario
EUR/USD is currently trading near 1.1600 after retreating from recent local highs. Immediate support is seen in the 1.1600–1.1560 zone, while resistance stands around 1.1680–1.1700. As long as markets continue repricing the Fed’s interest-rate path, the dollar is likely to retain an advantage. However, any signs of easing U.S. inflation or deterioration in the American economy could quickly restore demand for the euro.
A break below the 1.1700–1.1670 support area, as previously discussed in the article EUR/USD holds above 1.1700 as pressure builds, could further weaken the bullish outlook.
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