The euro drifted lower on Tuesday after fresh data revealed eurozone inflation cooled to 1.9% in May — its lowest level in seven months and comfortably below the European Central Bank’s 2% target. The EUR/USD pair slipped nearly 30 pips to trade just above $1.14, as traders recalibrated their expectations for more interest rate cuts from the ECB.

With price pressures subsiding, investors now anticipate the central bank will have more leeway to continue easing policy without jeopardizing economic stability. Markets are increasingly pricing in a 25-basis-point rate cut at Thursday’s ECB meeting, which would follow April’s move that brought the benchmark rate down to 2.25%.

As inflation falls and eurozone growth remains sluggish, the ECB faces pressure to accelerate policy support. Markets are now anticipating rates could decline to 2% by year-end — a stark reversal from the 4% peak reached in 2023 to combat runaway prices. A more dovish ECB could widen the monetary policy gap with the U.S. Federal Reserve, which remains in a “higher for longer” stance.

Technically, the euro remains well-supported above key simple moving averages. The pair is trading above the 50-day SMA at $1.1220, the 100-day at $1.0890, and the 200-day at $1.0820. These levels suggest underlying bullish momentum, although near-term direction hinges on Thursday’s policy signal from the ECB.

Looking forward, if the ECB signals a more gradual rate-cutting path, the euro could rebound and retest resistance near $1.16. However, any confirmation of a dovish bias or stronger divergence from Fed policy could drive further losses in the EUR/USD pair. Traders remain on edge as central bank decisions continue to steer currency markets.