Policy Divergence Widens as Dollar Rebounds, EUR/USD Struggles at 1.1646

Central Bank Divergence Takes Center Stage

The currency market is reflecting a widening gap between the Federal Reserve’s easing trajectory and the European Central Bank’s cautious stance. With EUR/USD trading near 1.1646—a retreat of approximately 0.60% on Monday—the Dollar has reclaimed its footing following Friday’s sharp losses driven by Fed Chair Jerome Powell’s dovish commentary at Jackson Hole. The US Dollar Index (DXY), which tracks the Greenback against six major currencies, has recovered to 98.23, gaining roughly 0.50% as demand for the currency strengthens across the board.

This recovery comes despite the Euro failing to benefit from mixed signals in Germany’s economic data. The IFO Business Climate Index improved to 89.0, surpassing the forecast of 88.6, while the Expectations component surged to 91.6 compared to the anticipated 90.2. However, the Current Assessment index disappointed, dropping to 86.4 versus the expected 86.7, suggesting underlying economic resilience remains fragile.

ECB President Signals Cautious Outlook

The real headwind for the Euro emerged from ECB President Christine Lagarde’s Monday remarks. Describing the Eurozone economy as “resilient but not thriving,” she projected growth of just 1% for 2025 and cited elevated US tariffs as creating “major disruption” for Europe’s export sector. These comments reinforced market expectations that the ECB will maintain its wait-and-see approach, further cementing the policy divergence with the Fed—which now faces growing pressure to cut rates as early as September.

Technical Pullback from Four-Week High

EUR/USD has retreated from Friday’s four-week peak of 1.1742, slipping below the psychological 1.1700 level as the market recalibrates its rate-cut expectations. The Greenback’s renewed strength reflects investor reassessment of the Fed’s timeline, following Powell’s dovish signals that pushed the Dollar lower just days earlier.

Economic Calendar to Drive Direction

The upcoming data releases hold the keys to near-term EUR/USD direction. In the United States, Consumer Confidence and Durable Goods Orders arrive on Tuesday, with Thursday bringing revised Q2 GDP and Initial Jobless Claims. The critical event—Friday’s Core PCE inflation reading—remains the Fed’s preferred inflation gauge and could cement expectations for a September rate cut.

On the Eurozone side, Thursday’s ECB Monetary Policy Meeting Accounts will provide insight into the central bank’s latest deliberations, while Friday’s German Consumer Price Index and Retail Sales data will signal the health of consumer demand and price pressures in Europe’s largest economy.

For traders monitoring broader asset correlations, movements in EUR/USD often carry implications for bitcoin price trajectories, as shifts in US monetary policy expectations typically ripple across risk assets. The dollar’s current strength suggests a period of consolidation before the Fed makes its next policy move.