EUR/USD Holds Steady as Fed Minutes Limit Dollar Weakness

Quick Take

EUR/USD is supported, but the upside is still not clean. Reuters reported on 21 May that the dollar rally paused on optimism over a possible Iran deal, with the dollar index little changed at 99.161, down from Wednesday’s peak of 99.472, the strongest level since 7 April. That pause helps the euro, but it does not remove the dollar’s underlying rate support.

What Is Supporting EUR/USD

The first support comes from a softer dollar tone. When markets become more hopeful about a U.S.-Iran deal, safe-haven demand for the dollar tends to cool. That gives EUR/USD room to stabilize after recent pressure from higher U.S. yields and stronger Fed pricing.

The second support comes from the ECB side. Reuters reported that ECB policymaker Olli Rehn said the central bank may raise rates to preserve credibility if war-driven fuel costs keep inflation pressure high. Sources also told Reuters that the case for a June hike was nearly sealed, although the ECB is unlikely to commit to future moves beyond that.

Why the Euro Still Cannot Break Out Cleanly

The problem is that ECB support is now more limited than before. Rehn also said there are few signs so far that high inflation is taking root in the euro area. That matters because it weakens the case for a long and aggressive ECB hiking cycle.

So the euro has a policy floor, but not a powerful new bullish engine. A June hike can help EUR/USD stay supported, yet if the ECB avoids promising further hikes, traders may hesitate to chase the euro too aggressively.

Why the Dollar Still Has a Strong Counterargument

The dollar still has support from the Fed. Reuters reported that minutes of the Fed’s April meeting showed intensified concern about inflation linked to the Iran war, with a majority of policymakers saying some policy firming would likely become appropriate if inflation stays persistently above the 2% target.

The official Fed minutes also noted that inflation remained elevated, partly because of higher global energy prices, and that Middle East developments were contributing to high uncertainty around the outlook. This keeps U.S. rate expectations from turning clearly dovish.

Near-Term View

My near-term view is that EUR/USD can remain supported while the dollar rally pauses and the ECB keeps a June hike on the table. But the pair may struggle to break higher unless U.S. inflation pressure eases or Fed officials sound less open to further tightening.

If oil prices cool and U.S. yields retreat, EUR/USD could extend higher. If Fed hike expectations remain alive, rallies may continue to face selling pressure near recent highs.

Conclusion

The main point is simple: EUR/USD has support, but not a clean breakout setup. A softer dollar tone and ECB rate expectations are helping the euro, while hawkish Fed minutes and energy-driven inflation risk are stopping the pair from becoming a straightforward bullish trade.