The EUR/USD pair concluded the week around 1.1600, continuing its consolidation phase for the fourth week in a row. In light of the volatility observed in risk assets, the pair has consistently traded within the range of 1.1400 to 1.1720, indicating a strategic equilibrium between a dovish Federal Reserve and a prudent European Central Bank. The euro experienced a modest increase early in the week, with Eurostat’s flash CPI reported at 2.2% year-on-year, surpassing expectations and rising from 2.1% in October, while core inflation rose to 2.5%. However, with headline inflation hovering near the ECB’s 2% target, policymakers indicated no immediate need for further tightening, stabilizing the EUR/USD within its medium-term equilibrium range. Monetary divergence remains the primary driver, with Fed rate-cut expectations rising to 87% and dovish comments from John Williams and Christopher Waller pulling the 10-year Treasury yield down to 4.02% and the DXY toward 99.70, its lowest level since July. Meanwhile, the ECB signals a pause, citing fragile eurozone conditions: PMI at 49.8, Q3 GDP at 0.0%, and retail activity up 0.3%, reflecting stabilizing consumption as real wages improve.
The technical structure of EUR/USD indicates a clearly defined bullish flag pattern with a base near 1.1500 and resistance at 1.1720 as the pair holds above the 50-week EMA (1.1475) and 100-week EMA (1.1380). RSI at 55 and a flat MACD reflect consolidation ahead of a policy-driven breakout, with potential targets at 1.1800 or, in case of downside, 1.1100 near the 200-week MA. A Fed rate cut in December could drive the pair through 1.1750–1.1800, whereas a hawkish hold risks a drop toward 1.1350–1.1400. Europe’s inflation narrative shows stabilization as Brent crude falls from $81.40 to $77.30 and natural gas prices decline 14% since October, easing industrial costs and imported inflation pressures. The eurozone trade surplus expanded to €18.6 billion, supported by stronger exports to Asia, while the U.S. PPI at 2.7% reinforces expectations of a Fed dovish tilt. The 2-year U.S.–German yield spread narrowing from 181 to 156 bps—its tightest since April 2024—historically precedes euro strength, and each 10-bp narrowing adds roughly 0.0025 to EUR/USD fair value, pointing toward 1.1750 if convergence persists.
Institutional positioning supports further euro appreciation, with CFTC data showing speculative euro longs rising to 93,000 contracts, the highest since June, and several European desks forecasting EUR/USD at 1.18–1.19 by early 2026, contingent on Fed easing. However, traders maintain caution given December volatility and U.S. data risks, with ISM PMI, ADP employment, and PCE inflation capable of shifting expectations significantly. Liquidity conditions are tight as year-end approaches, with overnight repo rates above 3.9% indicating dollar funding stress that traditionally strengthens the USD in thin markets, suggesting near-term EUR volatility. The DXY’s 3.2% drop over the past three weeks reflects a reassessment of Fed expectations, with immediate support at 99.40 and a deeper floor at 98.10, while weaker consumer confidence at 88.7, soft retail spending, and a three-year low in the RealClear Markets optimism index highlight household caution. However, safe-haven demand remains supportive for the dollar, and a move in Treasury yields above 4.25% could trigger a recovery toward 100.50–101.00, limiting EUR/USD gains under 1.17.
The euro shows relative strength against other currencies, with EUR/GBP trading near 0.8660 and Rabobank expecting continued euro appreciation through 2026 due to UK structural stagnation. EUR/JPY remains capped below 166.00 amid cautious sentiment tied to geopolitical tensions, enhancing the euro’s appeal as carry trades rotate toward low-volatility assets. Early December is crucial for the EUR/USD trend, with Eurostat set to release final inflation data for November and the U.S. preparing NFP, unemployment, and PCE reports. Consensus expects core PCE to fall from 2.8% to 2.6%, confirming disinflation; a print below 2.6% could propel EUR/USD rapidly into the 1.1750–1.1800 band. From a technical viewpoint, the 1.1600–1.1720 range is the central zone of contention, with daily-chart momentum accumulation and implied volatility declining from 7.5% to 6.1%, signaling readiness for a breakout. The macroeconomic alignment favors the euro over the next six months, as tightening yield spreads, U.S. disinflation, and stable eurozone inflation set the stage for a structurally bullish bias, and a weekly close above 1.1720 confirms the bullish flag, opening mid-term targets at 1.1800, 1.1950, and long-term resistance at 1.2100.