The volatility in the EUR/USD dropped to near record lows as the currency pair remained trapped in an extremely tight trading range. In the middle of April, the EUR/USD broke out to the upside and began to climb, hitting a high of 1.2980 in early June. The Euro gained strength primarily on US dollar weakness as traders began to look for an end to the US Federal Reserve’s tightening cycle. However, the Fed has continued to test the resolve of the market by tightening for longer and further than most analysts had expected. At the beginning of the year, US Fed funds rates were 4.25 percent, leading many to argue that 4.75 or 5 percent would be the top in rates. We are now at 5.25 percent and despite less hawkish comments from Fed Chairman Bernanke at his semi-annual testimony on the economy, a large portion of market participants still believe that he may raise rates again this year. Inflation has become such a grave concern for the Federal Reserve that they are increasingly willing to risk the possibility of a recession in the US economy at the expense of taming inflation. Which comes first will help to decide the fate of the US dollar in the second half of the year. In the meantime, Eurozone interest rates are on the rise. As the Federal Reserve inches closer to ending their rate hikes, the European Central Bank continues to remain extremely hawkish. Taking their time, the ECB has been conservative with their rate hikes in the first half of the year, but in the second half of the year, they are expected to be much more aggressive. The central bank has turned what typically is an administrative conference call meeting in the first week of August into a full fledged monetary policy meeting with a press conference afterwards, sending an extremely strong signal that they plan on raising rates in the beginning of the month with one or two more hikes to possibly follow in the second half of the year.