While the Fed grows increasingly cautious due to persistent inflation, the ECB remains committed to a gradual easing path, with a likely June rate cut already well-telegraphed. However, the market has arguably over-discounted European dovishness, while underestimating the possibility that the Fed delays cuts even further, flattening or even reversing the USD’s recent gains.

What strengthens the bullish case for EUR/USD is the narrowing room for USD upside. U.S. rate expectations have shifted considerably, and any signs of economic slowdown—or a softer inflation print—could quickly revive talk of Fed easing, undermining the dollar. Conversely, if the ECB only cuts once or twice while the Fed stays on hold, the policy divergence may actually narrow, favoring the euro.

On top of that, geopolitical risks (especially in the Middle East) are no longer delivering the safe-haven dollar strength they once did, as investors turn to gold and other hedges, diminishing USD's defensive appeal.

Geopolitical bid for USD looks weak vs. gold

EUR/USD at attractive levels with asymmetric upside if Fed pivots

LONG EURUSD

May 05 2025