EURUSD stalls after rebound as USD retains an advantage from higher interest rates and bond yields

From a macro perspective, after cutting rates by a total of 175 basis points since September 2024, the Federal Reserve is currently maintaining interest rates in the 3.50–3.75% range, reflecting a cautious stance as inflation remains not fully under control. Although price pressures have eased compared to previous periods, cost factors such as energy prices, production costs, and wages remain elevated, making inflation more persistent rather than quickly returning to target.

In this context, the scope for further tightening appears limited, yet a clear path toward easing has not emerged. The labor market remains relatively stable, while economic growth, although slowing, has not shown clear signs of deterioration. This supports a “higher for longer” policy stance, allowing the USD to retain its advantage through elevated interest rates and attractive bond yields.

On the other hand, the European Central Bank is facing a more complex backdrop. Inflation in the Eurozone has declined significantly and is no longer the primary concern, while economic growth remains weak. Notably, energy price risks continue to be a key variable for the region. Unlike the US, the Eurozone relies heavily on imported energy, making it more vulnerable to oil price shocks. Should energy prices remain elevated, inflation could re-emerge in the form of cost-push pressures, placing the ECB in a policy dilemma: tightening to contain inflation could further harm growth, while easing could risk reigniting price pressures.

These structural and policy differences, combined with a still-wide interest rate differential, continue to reinforce the USD’s advantage. With the Federal Reserve maintaining significantly higher rates than the European Central Bank, capital flows remain tilted toward the USD through the yield channel. While the US economy retains relative stability, the Eurozone faces structural constraints that limit the EUR’s ability to build sustained upward momentum.

From a market perspective, the current rebound in EURUSD likely reflects an adjustment in USD expectations rather than a meaningful improvement in the Euro’s fundamentals. This suggests that, in the absence of a clear shift in macro conditions, rallies in EURUSD may remain corrective in nature, while the medium-term outlook continues to be shaped by the USD’s relative advantage.