By Linh Tran, Market Analyst at XS.com
EURUSD surged strongly in yesterday’s trading session and is currently holding around the 1.1700 region as the market continues to adjust expectations regarding monetary policy from both the U.S. and the eurozone. The current upward trend reflects a combination of a weakening USD following the Fed’s rate cut and the relative stability of the Euro as ECB policy shows little volatility.
In the latest meeting early on December 11, the Fed cut interest rates by another 25 basis points, shifting policy toward easing while still maintaining a cautious stance regarding upcoming rate decisions. Specifically, the Fed signaled that it may pause in the upcoming meetings to further assess the sustainability of inflation and labor market conditions. The new dot-plot indicates that there may be one more rate cut in 2026, instead of the prolonged easing cycle that the market previously expected. The division within the FOMC, with three dissenting votes, further emphasizes this point.
Although the possibility that the Fed will slow down its rate-cutting process remains present, in the short term the USD lacks momentum to quickly strengthen again unless there is a surprise from inflation or employment data.
On the ECB side, monetary policy is showing significantly more stability compared to the Fed. The latest surveys from Reuters show that most experts expect the ECB to keep interest rates at 2% at least until the end of 2026. This reflects a backdrop in which eurozone inflation has approached the target, while growth has begun to stabilize again after a prolonged period of decline.
ECB President Christine Lagarde also recently emphasized that the eurozone’s economic outlook is better than expected, and the ECB is in no hurry to implement further easing measures. However, the strengthening of the EUR also creates certain challenges. A more expensive euro can reduce export competitiveness and may pull inflation below target if maintained for too long. Therefore, while the ECB remains neutral, it is simultaneously very sensitive to the risk of an excessively strong EUR.
EURUSD has maintained its upward momentum since early November. In addition to interest rates, one of the key drivers for this pair in recent weeks has been the narrowing yield spread between the U.S. and Germany. As U.S. 10-year Treasury yields fell due to Fed easing (at times dropping near 4.02%), while Germany’s long-term yields rose to a new high near 2.86%, capital flows have shifted back into European assets.
Furthermore, a more positive risk sentiment across global financial markets has reduced the demand for USD as a safe haven and has partly reinforced EUR’s upward trajectory.
However, the outlook for EURUSD is not entirely one-directional. The euro still faces several important risks, including the possibility that eurozone inflation falls below target, forcing the ECB to reconsider its policy stance; or political tensions in France and Italy that could trigger unexpected volatility in the region’s bond markets. Additionally, if upcoming U.S. economic data unexpectedly strengthens again, expectations for Fed easing could diminish significantly, creating short-term support for the USD and pressuring EURUSD.
Overall, the fundamental outlook for EURUSD in the short term still leans toward an upward trend, in the context of the narrowing interest-rate differential between the Fed and the ECB. However, the rise is likely to be steady and cautious rather than aggressively impulsive. Therefore, necessary technical pullbacks may occur and are likely to continue attracting renewed buying interest.