EUR/USD is currently positioned around 1.1665, holding steady above its recent breakout range following a rebound from 1.1525, a level that was previously identified as a significant Fibonacci zone. The pair holds steady as markets prepare for a pivotal Federal Reserve policy meeting anticipated to set the course heading into year-end. Market participants are aligning their strategies for a 25-basis-point rate cut, as indicated by the report, which now reflects an 88% probability, a significant increase from the 70% observed last week. This shift has impacted the U.S. Dollar Index, currently at 99.0, down from 101.4, maintaining a trend of weakness across major currency pairs. Meanwhile, the euro’s strength is bolstered by improving German macro data and hawkish signals from the European Central Bank, resulting in a notable divergence between the two monetary paths. The data from the U.S. reveals a varied but slowing trend. The core PCE price index increased by 0.2% month-on-month, aligning with forecasts, thereby maintaining inflation close to 2.8%. The 10-year Treasury yield has decreased to 3.81%, a decline from 4.45% observed in early November, as market participants expect the initiation of a monetary easing cycle. The contraction of real yield differentials, currently at their lowest since April, continues to support the euro in comparison to the dollar. In contrast, Germany’s industrial output saw an unexpected increase of 1.8% month-on-month in October, surpassing expectations of a 0.4% contraction, following a 1.3% gain in September. The robust performance of German data contradicts the prevailing narrative of a Eurozone slowdown and reinforces a sense of optimism regarding the region’s recovery prospects. Isabel Schnabel, an official from the ECB, emphasized this divergence by expressing her “comfort” with the prospect of a possible rate increase in 2026, pointing to the structural resilience present throughout the Eurozone. With the ECB adopting a hawkish stance while the Fed is set to implement cuts, EUR/USD finds itself in a favorable position above 1.1650, indicating a possible technical extension towards the range of 1.1750–1.1820.
The dollar’s weakness indicates a distinct shift in capital allocation towards currencies that offer more robust forward policy guidance. The U.S. fiscal deficit continues to exceed $2.1 trillion, while short-term Treasury yields hovering around 4.02% indicate a compression in real yields. The two-year U.S.–Germany spread, now below 110 basis points, marks its lowest level since May and historically indicates potential euro appreciation. Each 10-basis-point contraction between these yields generally contributes an increase of 0.0025–0.0030 to EUR/USD, indicating potential for an upward movement toward 1.1750 in the upcoming sessions. The price movement observed on the EUR/USD chart indicates a shift in momentum from a phase of consolidation to one of accumulation. The pair’s breakout above 1.1525, the 0.382 Fibonacci retracement, indicated a significant change in trend direction. Buyers have retained dominance since regaining 1.1653, the 0.618 retracement, with each retest of that level successfully absorbing selling pressure. Indicators confirm stability: the Parabolic SAR remains positive, the Supertrend holds a buy bias with trailing support at 1.1504, and RSI readings at 61 indicate steady bullish momentum without overextension. The subsequent resistance is positioned at 1.1728, coinciding with the 0.786 Fibonacci level, and is succeeded by 1.1822, which corresponds to the summer highs. On the downside, immediate support stands at 1.1550, with a secondary defense line at 1.1525, both acting as consolidation anchors.
As the Fed shifts towards a more accommodative stance, the ECB remains focused on maintaining inflation stability and warns against hasty reductions in interest rates. Inflation in the Eurozone remains around 3.0%, a figure that the ECB continues to consider high. The interplay of positive real wage growth, stable energy prices, and enhanced German output provides the central bank with justification to uphold a restrictive policy for an extended period. Typically, a 25-basis-point divergence in policy direction between the Fed and ECB results in a 2–3% appreciation in EUR/USD over a month-long horizon. If the Fed signals easing while the ECB maintains steady rates, the pair may continue to rise towards the 1.18 area in the first quarter of 2026. CFTC data indicate that speculative net long positions in the euro have risen by 11% week-on-week, whereas dollar longs have decreased by 8%, representing the most significant change since early 2025. European equity inflows have increased for three consecutive weeks, with the Euro Stoxx 50 appreciating by 2.7% as capital shifts away from U.S. assets. Cross-asset correlations indicate that EUR/USD is currently aligning with risk assets, reflecting investor confidence in European growth and stability. The euro’s strong performance relative to commodity-linked currencies such as AUD, CAD, and NZD highlights the ongoing structural demand driven by institutional rebalancing.
The FOMC decision on Wednesday is anticipated to determine the forthcoming directional movement for EUR/USD. A dovish 25-basis-point cut alongside language indicating the beginning of a prolonged easing cycle could drive the pair towards 1.1750–1.1820, whereas a hawkish stance might limit gains and lead to a short-term correction back to 1.1550. The ADP employment report, JOLTs job openings, and weekly jobless claims are likely to contribute to market volatility, particularly if they indicate a softening labor market that aligns with an initial easing phase. Implied weekly volatility currently registers at 7.9%, marking its peak since September, indicating that post-Fed movements exceeding 150 pips are probable. The EUR/USD setup continues to exhibit a bullish trend, provided it maintains its position above the 20-day EMA (1.1635) and the 200-day EMA (1.1575). The intraday structure of the pair indicates a consistent series of higher lows since mid-November, affirming the ongoing accumulation pattern. Momentum oscillators continue to show a positive outlook, as the MACD histogram stabilizes near zero, suggesting potential upward strength. A confirmed daily close above 1.1680 would pave the way for the next upward movement, with an initial target of 1.1728, followed by 1.1820. A close below 1.1525 would be the only factor to invalidate the bullish sequence. Current macroeconomic conditions support the ongoing strength of the euro, barring any unexpected hawkish moves from the Fed.
The trajectory of the U.S. deficit, along with a deceleration in labor momentum, diminishes the long-term appeal of the dollar. In Europe, the continuous enhancements in industrial production and export performance support the perspective that the region’s economy is on a path to stabilization. The Eurozone 10-year bund yield has increased to 2.38%, enhancing the nominal spread advantage over the U.S. and providing additional support to the currency. The sentiment surrounding EUR/USD has shifted firmly towards a bullish outlook. Dips toward 1.1600 are currently viewed as opportunities for acquisition rather than indicators of fatigue. The lack of significant rejection candles indicates that institutional accumulation is taking place, while retail positioning stays wary—creating a favorable environment for sustained upward momentum. The current indicators of volatility compression, decreasing dollar-hedging premiums, and stable open interest suggest that the market is shifting towards a medium-term uptrend for the euro, rather than experiencing a short-term correction.