- Monetary policy divergence is weighing on EURUSD.
- Europe has always recovered from crises.
The US dollar is on track to close the month with its biggest gain since July last year, thanks to the dollar's aggressive turn, gloomy European numbers and dovish comments from Christine Lagarde. As a result, the US-US yield spread is widening, triggering capital outflows and contributing to declines on more than five of the last six trading days.
In recent years, Europe has been in a state of constant turmoil. COVID-19, the armed conflict in Ukraine, the energy crisis, the political crisis in France, Donald Trump's tariffs and, finally, the conflict in the Middle East have weighed on the sentiment of European households, reinforcing their tendency to save. In 2025, they were saving 15 percent of their disposable income, compared to 12.5 percent before the pandemic. By contrast, in the US, the figure has fallen over this period from around 7% at the beginning of 2020 to 2.6%, according to the latest data from April. Since 2019, American consumption has increased by 18%, while that of Europeans has increased only 5.5%. This is precisely what explains the persistent lag in eurozone GDP growth.
To boost Europe's growth, domestic demand needs to be stimulated; However, this is hampered by an endless series of shocks. Due to the conflict in the Middle East, the currency bloc's economy is teetering on the brink of contraction and could well fall into negative territory in the second quarter. As a result, investors were skeptical about raising rates aggressively. Now that they are falling, there is no need to do so. Christine Lagarde's cautious tone on further hikes is understandable.
However, every sunset is followed by a sunrise. Eurozone GDP has recovered strongly since the pandemic and the region's economy has proven much more resilient to US tariffs than anticipated. Friedrich Merz's fiscal stimulus measures have raised hopes for rapid growth. Each time, the EURUSD pair has risen. The end of the conflict in the Middle East and the subsequent drop in oil prices are creating a springboard for a new rise.
For now, the euro is being dragged down by a “hawkish” surprise from Kevin Warsh. The futures market is pricing in a 65% chance of a Fed rate hike in September and estimates a 47% chance of two rounds of monetary tightening in 2026. However, if the rise in US inflation proves temporary, the numbers will fall and the EURUSD pair will find its footing. The first sign may come from the .
He FxPro Analyst team
