EUR/USD Struggles Near 1.05 as Fed’s Hawkish Tone Widens Gap with ECB

Summary: The EUR/USD currency pair remained under pressure this week, hovering near 1.1342 as of June 25, 2026, marking its lowest level in over a year. The dominant driver behind this move is the pronounced strength of the US dollar, fueled by hawkish signals from the Federal Reserve and robust US economic data. In contrast, the European Central Bank’s recent rate cut and dovish outlook have weighed heavily on the euro. This article explores the key factors behind EUR/USD’s decline, the broader FX landscape, and what traders should watch next.

The US dollar’s rally accelerated this week, with the US Dollar Index (DXY) climbing above 107.50 on June 25, reaching its highest level since November 2023. This surge reflects market expectations of further Federal Reserve interest rate hikes later this year, driven by Chair Kevin Warsh’s hawkish stance on inflation. Warsh’s comments on June 25 emphasized a tough approach to inflation, signaling that the Fed remains committed to tightening monetary policy despite some signs of economic slowing.

In stark contrast, the European Central Bank (ECB) cut interest rates by 25 basis points last week and indicated the possibility of further easing. This policy divergence has created a clear headwind for the euro, which slid to its weakest point in over a year against the dollar. The widening gap between US and European monetary policy is the primary catalyst behind EUR/USD’s downward trajectory.

US Treasury Secretary Scott Bessent publicly endorsed Chair Warsh’s approach, highlighting confidence in the Fed’s ability to balance inflation control with growth objectives. This political backing further solidifies the market’s conviction in a hawkish Fed path.

EUR/USD and the Dollar’s Strength

EUR/USD traded at 1.1342 on June 25, 2026, down slightly from 1.1340 the previous day, reflecting a modest 0.0176% move. While the daily percentage change appears small, the pair’s persistent weakness over recent weeks underscores a broader trend of euro depreciation against a firming dollar.

The euro’s slide is not isolated. Other major currencies like the Japanese yen remain near historic lows against the dollar, with USD/JPY trading around 161.9, its weakest level in 40 years. The Australian dollar also weakened, reflecting global risk sentiment and commodity price pressures.

Why Is the Dollar So Strong?

The dollar’s strength this week is anchored by hawkish Federal Reserve expectations. Chair Kevin Warsh’s recent remarks have reinforced the market’s view that the Fed will continue raising rates to combat inflation, despite some economic headwinds. The US Personal Consumption Expenditures (PCE) price index released on June 25 showed core inflation rising by 0.2% monthly and 2.8% annually, supporting the Fed’s tightening bias.

US economic resilience contrasts with the ECB’s dovish pivot. The ECB’s 25 basis point rate cut and signals of further easing reflect concerns about slowing growth and subdued inflation in the eurozone. This divergence has pushed EUR/USD lower, as investors favor the higher-yielding and more hawkish US dollar.

Political support for the Fed’s stance, including comments from Treasury Secretary Scott Bessent, adds credibility to the dollar’s rally. Bessent’s endorsement of Warsh’s tough inflation approach underscores the US government’s alignment with the Fed’s dual mandate priorities.

Risk Sentiment and Geopolitical Factors

Risk sentiment this week was mixed. US markets showed some risk-off tendencies due to slowing GDP growth and stretched valuations in the AI sector. However, a temporary easing of Middle East tensions on June 25, following Iran’s statement that the Strait of Hormuz would only be closed to enemy countries, helped calm markets. Falling oil prices also alleviated some inflation concerns, offering limited support to risk assets.

Despite these factors, the dollar’s safe-haven appeal and attractive yields have kept it firm against most currencies, including the euro.

Counterpoints and Technical Outlook

Some analysts caution that the dollar’s rally may be overextended. Brent Donnelly, president at Spectra Markets, noted that the USD-positive feedback loop “will probably burn itself out soon.” Technical indicators suggest EUR/USD is deeply oversold, which could trigger short-term corrective rebounds before the broader bearish trend resumes.

Indeed, EUR/USD’s proximity to key support levels near 1.13 raises the possibility of limited bounces, but the fundamental backdrop remains tilted toward further euro weakness unless the ECB shifts policy or US data disappoints.

What to Watch Next Week

The spotlight turns to the US June employment report due on Thursday, July 2, 2026. This data will be crucial in confirming the Fed’s tightening path. Strong payrolls growth could reinforce hawkish expectations and keep the dollar elevated, while a weaker report might open the door for a euro rebound.

Additionally, the US stock market and banking sector will be closed on Friday, July 3, 2026, for the Independence Day holiday, potentially reducing liquidity? and increasing volatility in the days leading up to the weekend.

Traders should also monitor any ECB commentary for hints of policy shifts amid the euro’s ongoing slide.

Final Verdict

The dominant FX theme this week is the widening monetary policy divergence between the Federal Reserve and the European Central Bank. The Fed’s hawkish stance under Chair Kevin Warsh and resilient US inflation data have propelled the dollar to multi-month highs, pressuring EUR/USD to its lowest level in over a year. The ECB’s recent rate cut and dovish signals have compounded euro weakness.

While technical oversold conditions may allow for short-term relief rallies, the fundamental outlook favors continued dollar strength unless US data disappoints or the ECB pivots. The upcoming US employment report on July 2 will be a critical catalyst for EUR/USD’s next directional move.

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FAQ

Why is EUR/USD near its lowest level in over a year?

The euro is weakening primarily due to the Federal Reserve’s hawkish monetary policy stance and resilient US inflation data, while the ECB recently cut rates and signaled further easing, creating a significant policy divergence.

How does the Fed’s policy affect the US dollar?

Hawkish Fed signals, especially from Chair Kevin Warsh, increase expectations of higher interest rates, boosting the dollar’s appeal to investors seeking yield and safety, which strengthens the currency against others like the euro.

What impact does the ECB’s rate cut have on EUR/USD?

The ECB’s 25 basis point rate cut and dovish guidance reduce the euro’s attractiveness relative to the dollar, contributing to EUR/USD’s decline.

What should traders watch next week for EUR/USD direction?

The US June employment report on July 2 is the key event. Strong job growth could reinforce dollar strength, while weaker data might allow the euro to recover. Also, monitor any ECB policy signals.

For a deeper understanding of currency dynamics and forex trading, see our guide on what is forex.