The EUR/USD pair extended its decline for a second consecutive session, hovering near 1.1610 during Asian trading hour on Friday, May 22,. The downside pressure comes as the US Dollar gains strength, supported by rising expectations that the Federal Reserve will maintain a hawkish monetary stance.
The Greenback continues to gain traction as markets increasingly anticipate that the Federal Reserve will maintain higher interest rates for longer. Prolonged energy supply disruptions linked to ongoing global conflicts risk feeding into core US inflation and shaping higher inflation expectations.
This backdrop strengthens the argument for tighter monetary policy. In addition, a solid US economic growth outlook further reinforces the case for sustained policy firmness, adding momentum to the Dollar’s upside.
Federal Reserve officials remain cautious as they assess whether adjustments to short term interest rates are necessary. While the central bank is currently holding rates steady, policymakers are gradually stepping away from earlier expectations of rate cuts.
Instead, there is growing openness toward raising rates again if inflation fails to cool in line with the Fed’s target. This shift in tone has played a key role in supporting the US Dollar.
Attention is also focused on leadership changes within the central bank. Donald Trump is set to swear in Kevin Warsh as the new Federal Reserve Chair at the White House, replacing Jerome Powell, whose term has expired but who continues to serve temporarily during the transition. This development could influence the future direction of US monetary policy.
On the data front, the US Department of Labor reported that Initial Jobless Claims declined by 3,000 to 209,000 in the second week of May, indicating continued resilience in the labor market.
Meanwhile, Continuing Jobless Claims rose slightly to 1,782,000 for the week ending May 9, up from 1,776,000 previously. Although this suggests some mild softening, overall labor conditions remain stable, supporting the Fed’s cautious but firm policy stance.
Euro Pressured by Eurozone Economic Contraction
The Euro continues to struggle against the US Dollar as traders react to weaker economic conditions in the Eurozone. According to the latest S&P Global flash PMI data, the region’s economy contracted in May at its fastest pace since late 2023.
The downturn has been driven by rising living costs linked to ongoing conflicts, which have weighed on services sector demand. At the same time, input price inflation surged to a three year high, adding further pressure on the region’s economic outlook.
Market participants are now closely watching upcoming German economic releases, including the GfK Consumer Confidence Survey for June, first quarter GDP figures, and the IFO Business Climate Survey.
These indicators are expected to provide further insight into the strength of Europe’s largest economy and could influence the near term direction of the Euro.
With the US Dollar supported by firm economic fundamentals and a hawkish Federal Reserve outlook, while the Euro faces mounting economic headwinds, EUR/USD is likely to remain under pressure in the near term. Future price action will depend heavily on incoming economic data and evolving central bank signals from both the United States and the Eurozone.
