Markets price an 87% chance of a June ECB rate hike while Fed signals remain mixed amid inflation and geopolitical risks.
EUR/USD remained in a tight range as traders awaited fresh catalysts, with the European Central Bank poised for a potential 70 bps of hikes starting in June. The market now assigns an 87% probability to a June move, driven by persistent inflation concerns despite Middle East tensions.
The US dollar regained some ground this week after higher-than-expected inflation data and stalled US-Iran negotiations. Fed policymakers have increasingly discussed keeping all options open, including rate hikes, as inflation remains above the 2% target. A potential reopening of the Strait of Hormuz could ease oil prices and inflation fears, but economic activity rebound risks prolonging price pressures.
Positioning remains bearish on the USD, though prolonged oil supply disruptions or a hawkish Fed pivot could trigger a sharp reversal. The ECB, meanwhile, has signaled rate hikes are likely unless oil prices drop significantly, keeping EUR supported near-term.