Lloyds expects EUR/USD to retreat towards 1.1214 this summer as persistent US inflation risks restore the Dollar’s interest-rate advantage.

At Friday’s market close, the Euro to Dollar (EUR/USD) exchange rate was quoted at $1.1371, down 0.05% on the day and from $1.1438 the previous Friday.

EUR/USD fell in four of the five sessions and finished just above July’s low at 1.1362, leaving the Euro on the defensive heading into the new week.

Lloyds Bank says the latest rise in energy and wider commodity prices has revived inflation concerns, but the policy consequences are likely to be more challenging for the United States than the Eurozone.

“The Fed faces a more challenging mix than slow Europe, the USD ought to benefit from that,” says Nicholas Kennedy, FX strategist at Lloyds Bank.

The US economy has absorbed the latest energy shock with relatively little damage to domestic demand.

Lloyds points to resilient household consumption, a steadier labour market, rising equity-market wealth and the continuing AI investment boom. Tariffs, tight inventories and wider supply constraints are adding to the underlying price pressure.

Europe faces a less supportive combination.

The European Central Bank may still raise interest rates further, but higher input costs and tighter monetary policy are also likely to weigh more heavily on the Eurozone’s already-fragile demand and confidence.

Markets May Still Be Underpricing the Fed

“One soft month for inflation data does not alter those underlying influences,” Kennedy says.

At the time of Lloyds’ 23 July report, markets had almost two Federal Reserve rate increases priced by the end of 2026.

“While the market now has almost two Fed hikes priced in by year-end, there is not much after that,” the bank says, noting that only another 13 basis points of tightening was priced through to the middle of 2027.

Lloyds believes that may prove too cautious if strong demand continues to collide with limited supply, accommodative financial conditions and rising business costs.

“If ECB assumptions are too hawkish, we’d still see the Fed curve as too low,” Kennedy adds.

The implication for EUR/USD is that US-Eurozone rate differentials could move back in the Dollar’s favour even if the ECB retains a hawkish policy stance.

With Eurozone growth fragile and investors reluctant to revive the broader anti-Dollar trade, Lloyds says the Dollar’s carry advantage is beginning to reassert itself.

“A further drift down towards EUR/USD 1.1214, if not a bit below… remains our expectation over the summer,” the bank concludes.

EUR/USD Technical Outlook Remains Soft

The short-term chart also points to a continued downside bias.

EUR/USD ended Friday below the session VWAP at approximately 1.1381 and the 200-period moving average near 1.1392.

The 14-period RSI stood at 44.3, below the neutral 50 level but not yet signalling oversold conditions.

Initial support is located at July’s 1.1362 low.

A sustained break below that area would strengthen the case for another move lower and keep Lloyds’ 1.1214 target in view. That level is approximately 1.4% below Friday’s close.

Lloyds identifies 1.1065 as the next technical support should EUR/USD fall below the 1.12 region.

On the upside, the pair would need to recover the 1.1381–1.1392 area to ease immediate selling pressure.

Until then, the approaching Federal Reserve meeting and any further evidence of persistent US inflation will remain important tests of the bank’s bearish summer forecast.