Written by Linh Tran, Market Analyst at XS.com
At present, EUR/USD is in a phase lacking clear directional momentum, as monetary policy, economic data, and geopolitical developments are simultaneously shaping investor expectations.
The most important pillar influencing EUR/USD remains the divergence in monetary policy expectations between the United States and the Eurozone. On the U.S. side, the Federal Reserve continues to maintain a cautious, data-dependent stance. Although the unemployment rate has risen to 4.6%, initial jobless claims remain very low (199k), indicating that the U.S. labor market continues to demonstrate resilience. At the same time, inflation (2.7%) – while easing from its peak – has yet to return sustainably to the Fed’s target range. As a result, the Fed lacks sufficient grounds to signal an aggressive easing cycle, leading markets to push back expectations for interest-rate cuts in 2026. This backdrop helps the U.S. dollar maintain a relatively stable base, particularly during periods of heightened risk aversion.
By contrast, the European Central Bank is pursuing a policy-stability strategy with a high degree of flexibility. According to ECB communications and economic reports, inflation in the Eurozone is declining more slowly than expected, while economic growth – although weak – has so far avoided a deep recession. Eurostat data show that annual inflation in the euro area stood at 2.1% in November 2025, down from 2.2% in the previous month and close to the ECB’s medium-term target. At the same time, the latest European Commission forecasts suggest that euro-area inflation will ease modestly from around 2.1% in 2025 to 1.9% in 2026, reflecting gradually diminishing price pressures.
Against this backdrop, the ECB has refrained from issuing strong signals of decisive monetary easing in order to preserve its credibility in price stability. This stance has helped the euro avoid heavy selling pressure, but it also means that the currency lacks sufficient momentum to clearly outperform the U.S. dollar. In this environment, the policy differential between the Fed and the ECB does not decisively favor either side, making it difficult for EUR/USD to establish a strong and sustained trend.
Beyond monetary factors, geopolitics has emerged as a catalyst amplifying short-term volatility. News of the United States capturing the President of Venezuela on January 3, 2026 heightened global risk sentiment, prompting capital flows back into the U.S. dollar as a safe-haven asset and placing corrective pressure on EUR/USD. However, the impact of this event remains largely psychological and short-lived, and is unlikely to materially alter the pair’s underlying fundamental trajectory.
Within the Eurozone, internal political risks continue to weigh on the euro’s appeal. Debates surrounding the use of frozen Russian assets to support Ukraine, rising fiscal pressures linked to increased defense spending, and divergent growth paths among member states have made investors more cautious toward euro-denominated assets. During periods of heightened risk, the euro is typically not favored as a safe-haven currency, leaving EUR/USD more vulnerable to downside adjustments when market sentiment deteriorates.
After the U.S. dollar recorded a pronounced decline in 2025, much of the negative sentiment toward the currency has already been priced in. According to surveys of foreign-exchange strategists conducted by Reuters, as markets move into 2026, speculative short-USD positions are gradually being reduced, with trading behavior shifting toward a more data-driven approach. This has caused EUR/USD advances to become increasingly sluggish, often accompanied by clear profit-taking rather than extending into a one-directional trend as seen previously.
In my view, in the short term, the U.S. dollar is likely to remain supported by resilient U.S. economic data and its safe-haven role amid geopolitical risks, limiting the upside potential for EUR/USD and potentially prompting a necessary corrective phase. Over the medium term, the outlook for the pair will depend largely on the trajectory of U.S. inflation and policy signals from the Fed. If inflation continues to ease and the Fed adopts a more dovish tone, EUR/USD could sustain its broader structural uptrend. Conversely, any renewed signs of overheating in inflation or the U.S. labor market would quickly reinforce the dollar’s advantage.
Overall, EUR/USD appears to be moving through a phase of slow gains, correction, and consolidation, in which investors remain cautious and await confirmation from hard data, rather than overreacting to short-term, event-driven volatility.