Key Takeaways:
The euro has reclaimed the 1.14 handle against the dollar after bouncing from multi-month lows, and Scotiabank says the best-performing G10 currency has room to extend gains toward 1.1450.
The euro climbed back above $1.14 Friday, recovering from this week's low near 1.1325, as a softer dollar and falling oil prices supported the single currency despite markets scaling back expectations for further European Central Bank rate increases.
"The euro is showing signs of stabilizing even as markets trim ECB rate hike expectations, with the recovery from the 1.1325 low encouraging on a technical basis," said Shaun Osborne, chief currency strategist at Scotiabank.
The ECB's one-year inflation expectations eased to 3.5 percent in May from 4.0 percent previously, while Brent crude has fallen sharply, reducing imported price pressures across the eurozone. Scotiabank sees intraday momentum supporting a push toward the 1.1440-1.1450 area in the near term, with the pair already reaching its first upside retracement objective.
The euro's fate now hinges on the back-to-back central bank meetings on July 23 and July 29, when the ECB and Federal Reserve respectively set policy. If the ECB signals further tightening while the Fed holds, the rate-divergence trade that has been neutralized by both banks turning hawkish in June could reawaken, potentially driving EUR/USD toward the upper end of its 2026 range.
The Dual Hawkish Pivot That Trapped the Pair
The ECB raised its deposit rate by 25 basis points to 2.25 percent on June 11, its first increase since 2023. Six days later, the Fed held its benchmark at 3.50 percent to 3.75 percent but delivered a hawkish shock of its own: nine of 18 Federal Open Market Committee participants projected tightening before year-end, and the median dot plot shifted to 3.8 percent from 3.4 percent in March.
That dual hawkish pivot collapsed the rate-divergence trade that typically drives sustained EUR/USD trends. The gap between Fed and ECB policy rates has narrowed to roughly 1.50 percentage points from a peak near 3.25 points in 2023, but with both central banks now leaning in the same direction, neither provides the clean directional signal needed to break the pair out of its range. EUR/USD has traded between 1.1435 and 1.2019 this year, and at 1.1387 it sits toward the soft end of that band.
The Dollar Remains the Dominant Lever
Today's bounce traces to a dollar correction, not a euro fundamental shift. The US Dollar Index stalled after tagging the 101.80 resistance zone Wednesday and has eased back toward 101.20, letting EUR/USD lift off its lows. The move is mechanical — a pause in the dollar's climb rather than a genuine reversal in the pair's dynamics.
US data continues to support the dollar's bid. First-quarter gross domestic product printed at 2.1 percent, stronger than anticipated, while core personal consumption expenditures — the Fed's preferred inflation gauge — rose 0.3 percent month-over-month. With headline consumer price inflation running at 4.2 percent and growth holding up, the Fed has room to follow through on the hike its dot plot signaled. Markets price roughly 80 percent odds of at least one Fed hike this year.
On the eurozone side, the ECB's ability to sustain its tightening cycle is constrained by a stalling economy. Eurozone gross domestic product contracted in the first quarter, and the ECB trimmed its 2026 growth forecast to around 0.8 percent. A central bank hiking into near-recessionary conditions has limited runway, which is why markets price only about 30 basis points of additional ECB tightening beyond the June move.
The Levels That Matter
Immediate support sits at 1.1350, reinforced by the lower Bollinger Band and a cluster of moving averages. A sustained break below that level opens the door toward the 1.1300 psychological handle and, beyond that, the 1.11-1.12 region if the broader range breaks down. Resistance runs at 1.1411 first, then 1.1530 and the 100-day moving average at 1.1650.
The 1.14-1.15 zone has absorbed multiple tests already, including the March 2026 tariff-shock low at 1.1435 and the June 19 intraday low. If the zone holds on a weekly closing basis, what looks like a bearish breakdown becomes a failed breakdown — a setup that would itself flip bullish. The resolution waits for the July central bank meetings, where the rate-divergence question finally gets answered.
This article is for informational purposes only and does not constitute investment advice.
