EUR/USD: There are also the rate differentials - Commerzbank

There is another reason why the USD is struggling to gain ground against the euro: the interest rate differential. The market is now pricing in just under two interest rate cuts by the Fed by the end of the year, but only one by the ECB. The fact that the Fed is likely to cut rates more sharply than the ECB this year is probably already largely priced into the EUR/USD. Nevertheless, changes in expectations could lead to adjustments in EUR/USD, Commerzbank's FX analyst Antje Praefcke notes.

Rate divergence caps USD gains vs. Euro

"Therefore, the minutes of the last FOMC meeting in June are likely to attract attention this evening. The dot plots, i.e. the expectations of the FOMC members for the Fed Funds, seem to be drifting further apart. For 2025, expectations continued to include a 50 basis point cut in key interest rates, i.e. two steps. However, this was a close result. Seven of the 19 meeting participants do not expect any further cuts this year (in March there were only four) and two others expect only one cut. On the other hand, eight meeting participants expected two cuts and two expected three cuts."

"Hence, the discussions in the minutes about the conditions under which more FOMC members might lean toward interest rate cuts are likely to be scrutinized closely. As the US labor market remains fairly robust and the inflation target has more or less been achieved (PCE index at 2.3% in May, core PCE index at 2.7%), our economists are probably right not to expect an interest rate cut before September."

"However, a stronger tendency toward interest rate cuts, which could be interpreted as the Fed 'giving in' to sustained pressure from the US president, could continue to weigh on the USD and prevent it from making further gains or corrections."