The EUR/USD pair concluded the week at 1.1607, experiencing a decline of nearly 0.4% as the U.S. dollar continued to strengthen across the G10 complex following the Federal Reserve’s indication that a December rate cut is “not a foregone conclusion.” The euro momentarily reached 1.1650 before retreating below 1.16, marking its lowest performance since late September. The recent resurgence of the dollar can be attributed to a significant adjustment in Fed futures—where the likelihood of a 25 basis-point cut at the December FOMC decreased from 90% to 63% within just one session—resulting in tighter global liquidity and bolstering the dollar’s supremacy. This week, the cautious tone of the Federal Reserve has significantly influenced currency flows. Chair Jerome Powell highlighted the importance of maintaining a “data-dependent” policy, leading to a significant increase in U.S. Treasury yields. The 2-year yield increased to 4.86%, rising almost 15 basis points from Monday’s opening, while the 10-year note moved back above 4.35%, contributing to the dollar’s most significant weekly gain since August. The U.S. Dollar Index experienced a significant increase, approaching 106.2 and surpassing its 50-day average for the first time in two months. The recent actions undermined the euro’s effort to maintain a position above 1.1650, prompting traders to swiftly shift back to dollar-denominated assets in light of renewed uncertainty regarding interest rates.
The euro’s decline was somewhat mitigated by Eurozone Q3 GDP growth of 0.2% quarter-on-quarter, surpassing the anticipated 0.1%. However, inflation continued to decelerate, with October CPI slipping to 2.4% from 2.8%, reinforcing expectations that the European Central Bank will keep its policy rate steady at 4.50% well into 2026. In October, the PMI composite remained steady at 51.1, indicating slight expansion with minimal acceleration. This measured growth perspective highlights the euro’s strategic weaknesses: although the fundamentals indicate stability, they do not possess the drive to offset a strengthening dollar. The EUR/USD technical landscape indicates increasing pressure. The pair’s consistent inability to maintain levels above 1.1635 indicated a loss of momentum, while the decline below 1.1575 revealed potential downside exposure towards the range of 1.1525–1.1450. The 50-day moving average at 1.1580 currently serves as immediate resistance, whereas the 200-day average at 1.0940, though distant, is on an upward trajectory, indicating medium-term support. The current Daily RSI stands at 44, reflecting a bearish bias while remaining above the oversold threshold, indicating potential for additional declines. Scotiabank analysts identified 1.1525 as the crucial pivot zone—should it be breached, the subsequent target is around 1.1450, levels that have not been observed since early summer.
The U.S.–China trade truce, revealed during President Trump’s Asia visit, contributed to the stabilization of the greenback. The agreement encompasses a decrease in tariffs on imports from China, a one-year pause on the introduction of new trade policies, and a pledge from China to restart soybean purchases. This development alleviates global risk sentiment while simultaneously increasing demand for the dollar due to renewed capital inflows into U.S. assets. The market’s muted response indicated doubts regarding the enduring advantages; however, it currently supported U.S. yields—creating an additional challenge for the euro. Danske Bank presents a nuanced perspective on EUR/USD, characterizing it as “tactically bearish but strategically bullish.” In the near term, the dollar’s yield advantage and the Fed’s hawkish stance are expected to maintain pressure on the pair, keeping it below 1.1650. However, in the longer term, political and fiscal dynamics may lead to a shift. The bank anticipates that political pressure on the Fed to reinstate easing measures in 2026—especially if unemployment exceeds 4.2%—may lead to a structural weakening of the dollar. In this context, Danske’s strategic target is set at 1.22 by the end of 2026, contingent upon Eurozone growth stabilizing at approximately 0.3% quarterly and U.S. inflation returning to a level of 2.5%.
The variation in forecasts underscores the prevailing uncertainty within the market. RBC Capital Markets anticipates that EUR/USD will rise to approximately 1.24 by the end of 2026, attributing this projection to a narrowing yield differential following the conclusion of the Fed’s easing cycle. On the other hand, ING anticipates a more cautious trajectory, projecting 1.20 as a feasible target for the end of 2025, influenced by a gradual recovery in the Eurozone and ongoing caution from the Fed. Both forecasts suggest potential gains from current levels; however, there is consensus among analysts that the upcoming quarter may challenge investors’ patience due to the prevailing short-term strength of the dollar. The weekly chart illustrates a distinct descending channel that has formed since the mid-October peak at 1.1710, indicating that sellers are currently in control of momentum. A close below 1.1550 would indicate a continuation toward 1.1400, whereas a rebound above 1.1635 could trigger a corrective move toward 1.1720, marking the upper boundary of the summer range. Volume data indicates a 12% increase in short positions last week, reflecting new bearish positioning. Meanwhile, open interest has increased to 274,000 contracts, indicating a strengthening belief in the downside.
The overarching macroeconomic environment remains supportive of the U.S. dollar. Currently, the Fed funds rate is positioned at 5.25–5.50%, whereas the ECB deposit rate is limited to 4.50%. Market pricing indicates that there is merely a 25% probability of additional tightening in Europe prior to 2026. The interest rate spread of approximately 100 basis points continues to drive capital outflows from the euro area, especially towards short-duration U.S. assets. Simultaneously, the U.S. labor market exhibits resilience, maintaining an unemployment rate of 3.8% and job openings exceeding 8.7 million, which stands in stark contrast to the euro area’s vulnerable employment growth. Retail trader positioning from data indicates a 58% net long exposure on the euro, which serves as a contrarian indicator pointing to potential further downside risk. Institutional traders, however, maintain a largely neutral stance, weighing U.S. macroeconomic strength against the stabilization observed in Europe. Futures implied volatility is currently at 6.3%, a decrease from 7.1% last month, suggesting that the market is preparing for a consolidation phase prior to the next directional movement. The options skew continues to favor puts, suggesting that traders are positioning themselves to protect against a decline below 1.1500 in the near term. The short-term outlook for EUR/USD appears negative, influenced by U.S. yield trends and the Federal Reserve’s cautious approach. Nonetheless, the medium-term framework for the pair suggests a steady recovery as rate differentials begin to converge. The critical consideration revolves around timing: can the euro maintain the 1.15 level sufficiently for macro fundamentals to shift?