As the market considers a carefully balanced mix of euro-positive and dollar-positive events, EUR/USD starts the final session of May trading around the 1.1640 level, hovering a few pips above recent multi-week lows and stabilising in a tight band. The pair has regained momentum over the past week, establishing a position above the 1.1600 mark and at times approaching 1.1655 during early Friday trading. This movement comes as the demand for the dollar as a safe haven diminished following the announcement that Washington and Tehran have agreed to a memorandum of understanding to extend their ceasefire by 60 days. Yet the recovery is being approached with caution rather than confidence, and the technical structure illustrates a pair that has rebounded but not achieved a breakout: on the shorter timeframes, EUR/USD remains beneath its key simple moving averages, a setup that indicates rallies are likely to encounter resistance, with the possibility of a retest of nearby support firmly in play. The honest read into month-end is that the euro is holding its ground rather than seizing the initiative — the dollar’s retreat on ceasefire optimism has handed the single currency a tailwind, but the structural rate gap, the sticky U.S. inflation backdrop, and a Fed under hawkish new leadership are all conspiring to cap the advance, leaving the pair to consolidate while the market awaits the cluster of central-bank meetings and data releases that will set direction into June.
The primary short-term catalyst for EUR/USD is the fluctuating U.S.-Iran ceasefire situation, which predominantly influences the dollar and has resulted in some of the most significant currency fluctuations observed this year. The White House has confirmed an agreement on a memorandum of understanding to extend the ceasefire for 60 days and facilitate formal negotiations. However, President Trump has notably withheld his approval, while Vice President JD Vance has indicated that several critical issues — primarily Iran’s uranium enrichment and control over the Strait of Hormuz — remain unresolved. The market mechanics are clear: as hopes for a ceasefire increase, the demand for safe-haven assets like the dollar diminishes, leading to a depreciation of the greenback and a corresponding rise in EUR/USD. Conversely, each escalation or accusation of breach — and there have been numerous instances, with Iran at one point alleging that the U.S. violated the agreement — rekindles the dollar’s appeal as a safe haven and exerts downward pressure on the euro. The truce remains highly tenuous, characterised by ongoing reciprocal assaults in the Persian Gulf, and the Strait of Hormuz is far from being completely reopened. Consequently, EUR/USD is likely to be significantly influenced by news developments: a ratified peace agreement could lead to a swift depreciation of the dollar, whereas a breakdown in negotiations could trigger a sharp increase as investors seek safe havens.
Beneath the geopolitical noise lies the structural foundation of the EUR/USD trade, with the interest-rate differential between the two central banks serving as the anchor for the pair’s medium-term trajectory. The current disparity strongly favours the dollar, as the Federal Reserve maintains its policy rate within the 3.50% to 3.75% range, in contrast to the European Central Bank’s significantly lower rate of 2.00%. This results in a 150-to-175-basis-point advantage that, ceteris paribus, attracts capital towards dollar-denominated assets while exerting downward pressure on the euro. The crucial development, however, is that this gap is now beginning to narrow, and that narrowing is the main structural story supporting the euro over the medium term. The convergence is being driven from both ends: in the United States, persistent inflation has constrained the Fed’s ability to cut rates even as growth slows, but the more significant shift is occurring in Europe, where the ECB is increasingly indicating that its next action is likely to be a rate hike rather than a pause, which would narrow the differential and enhance the euro’s relative attractiveness. The takeaway for the forecast is that while the absolute rate gap remains a dollar-positive force in the present context, the trajectory has shifted to favour the euro. Currency markets respond more to changes in expectations than to the current levels; thus, as the market anticipates the ECB’s alignment with the Fed’s stance, the structural pressures that have constrained EUR/USD throughout much of the cycle are slowly being alleviated.
A central pillar of the medium-term euro case is the deteriorating quality of U.S. economic data, which is beginning to exhibit a distinctly stagflationary character — slow growth coupled with persistent inflation, the most unfavourable combination for a central bank and, consequently, for a currency. The first-quarter GDP figure was revised down to a 1.6% annualised pace, falling short of the 2.0% forecast, indicating a clear decline in growth momentum. Concurrently, the consumer sector has also shown signs of weakness, with April consumer spending increasing by merely 0.1% and personal income experiencing a decrease of 0.1% for the month. This is of significant importance for EUR/USD as it places the Federal Reserve in a challenging position: typically, slowing growth would suggest the need for rate cuts to bolster the economy; however, the ongoing inflationary pressures constrain the Fed’s ability to lower rates, resulting in a policy stance that remains restrictive despite a decelerating expansion. A central bank caught in the dilemma of sluggish growth coupled with elevated inflation is unable to implement the robust, growth-enhancing measures typically necessary to bolster its currency. As the U.S. economy continues to exhibit signs of stagflation, market confidence in the dollar’s stability will increasingly come under scrutiny. For the euro, this narrative centers on relative strength: as the U.S. edges closer to stagflation while the eurozone’s central bank gears up to address its own inflation challenges, the policy divergence that previously benefited the dollar may start to shift. Consequently, EUR/USD could experience a fundamental tailwind that functions independently of the daily ceasefire developments.
The inflation aspect of the American equation is what imparts residual strength to the dollar and constrains the euro’s progress, despite underwhelming growth figures. Core PCE, the Fed’s preferred inflation gauge, remained at 3.3% year over year in April — marking its fastest pace in approximately three years — indicating that price pressures persist and providing the Fed with minimal rationale to implement cuts. This persistent inflation is the reason the dollar has demonstrated resilience even amid the ceasefire-driven safe-haven unwind, as investors increasingly reassess the Fed’s trajectory and conclude that policymakers may need to maintain a firmer grip on policy while energy-driven inflation risks remain. The complication for the dollar lies in the leadership transition: Kevin Warsh will preside over his first FOMC meeting in mid-June, inheriting a genuinely thankless bind — increasing inflationary pressures coupled with tepid growth on one hand, and a President demanding lower interest rates on the other, which stands in stark contrast to market expectations. This political tension introduces a wildcard for EUR/USD, as the market’s hawkish interpretation of Warsh has bolstered the dollar. However, any indication that the new chair may yield to White House pressure for cuts could significantly weaken the greenback and elevate the euro. Currently, the prevailing scenario suggests a hawkish stance that maintains a strong dollar. However, the upcoming June meeting presents a pivotal moment that could decisively influence the EUR/USD range, contingent upon Warsh’s handling of the political complexities associated with his legacy.