EUR/USD Holds Near 1.16 as Dollar Stabilises and ECB Rate Bets Stay Alive

Quick Take

EUR/USD is still holding near the 1.16 area, but the pair does not look ready for a clean upside breakout. Reuters reported on 26 May that the euro slipped slightly to around $1.163, while the dollar index stood near 99.031 as the dollar found its footing after earlier volatility around Middle East peace hopes.

What Is Supporting EUR/USD

The main support for the euro is still ECB policy expectations. Reuters reported that ECB board member Isabel Schnabel said the central bank should raise rates in June even if an Iran peace deal is reached, because the conflict has already damaged energy infrastructure and kept energy prices high enough to push inflation above target.

That gives EUR/USD a policy floor. The euro is not rising because the eurozone economy looks especially strong; it is holding up because markets still believe the ECB may need to defend its inflation credibility.

Why the Dollar Is Not Breaking Down

The dollar side is still strong enough to stop EUR/USD from moving higher smoothly. Reuters reported that optimism over a quick reopening of Hormuz faded after fresh U.S. strikes in southern Iran and comments from U.S. Secretary of State Marco Rubio that a peace deal could still take a few days.

That matters because EUR/USD had benefited when safe-haven demand for the dollar cooled. Once peace optimism became less certain, the dollar stopped weakening. In other words, the euro has support, but the dollar has not lost control.

The Fed Still Gives the Dollar a Floor

The Federal Reserve is another reason the dollar remains difficult to sell aggressively. The April FOMC minutes said inflation remained elevated, partly because of higher global energy prices, and that Middle East developments were adding a high level of uncertainty to the economic outlook. The Fed also kept rates at 3.50%–3.75%.

For EUR/USD, this means the rate story is balanced rather than one-sided. The ECB may hike, but the Fed is not clearly moving toward easing. That keeps the pair trapped between euro-side policy support and dollar-side yield support.

Why the Pair Looks Rangebound

The current setup is a tug-of-war. The euro has ECB rate-hike expectations, but the dollar has geopolitical uncertainty, Fed caution, and still-elevated inflation risk. Unless one side of that balance breaks, EUR/USD may keep moving sideways instead of forming a clean trend.

A stronger EUR/USD move would likely need a clearer drop in U.S. yields, softer U.S. inflation data, or stronger ECB guidance beyond June. A stronger dollar move would likely need renewed oil stress, more hawkish Fed pricing, or a clear failure in peace negotiations.

Near-Term View

My near-term view is that EUR/USD can remain supported on dips, but upside may stay limited while the dollar stabilises. The euro has enough policy support to avoid looking weak, yet the dollar still has enough macro support to prevent a smooth euro breakout.

Conclusion

The main point is simple: EUR/USD has support, but not full freedom. ECB rate expectations are helping the euro, while a stabilising dollar and hawkish Fed backdrop are keeping the pair in a controlled range rather than a clean bullish trend.