The US dollar is experiencing a strong rally this week, driven by hawkish Federal Reserve rhetoric and higher inflation. This shift in short-term rate dynamics is making it difficult for the EUR/USD pair to rebound, potentially testing the 1.10 level if upcoming data supports the dollar further. Analysts do not foresee a break below 1.10 at this stage.
The dollar's strength is primarily rates-driven, with real front-end rate differentials fueling its momentum. The DXY index has returned to levels last seen during Liberation Day in April 2025. High-beta currencies are not benefiting from the equity rebound due to this environment, indicating solidity in the AI trade despite higher interest rates.
In the eurozone, ECB members are unlikely to match the hawkish tone of their US counterparts. Gabriel Makhlouf, a hawkish-leaning voice, called for caution on tightening, noting that price pressures remain limited to energy. This contrast between the Fed and ECB is widening the two-year swap rate differential, increasing the risk of EUR/USD testing 1.100.
In Romania, elevated inflation is expected to keep the National Bank of Romania's rates unchanged at 6.50% until at least the second quarter of 2027. The EUR/RON exchange rate has stabilized slightly above 5.340, with excess liquidity in the banking sector falling to zero. A recovery in liquidity is anticipated for the remainder of the year.
Across Central and Eastern Europe, energy price rebounds and a stronger dollar are putting pressure on local currencies. EUR/PLN has returned to near its local high of around 4.420, while EUR/CZK and EUR/HUF have also reached higher levels. The regional calendar is light today, leaving markets driven by broader global narratives.