EUR/USD has retraced to the 1.1710–1.1740 range following its test of the 1.18 level, yet the fundamental macro backdrop remains favorable for the euro. The ECB has maintained its key rate at 2.00% for the fourth consecutive meeting, while also increasing its growth and inflation projections for 2026. Core Eurozone inflation remains at approximately 3.1%, while services inflation is trending upward to 4.2%. Additionally, the ECB’s Q3 negotiated wage tracker indicates increasing pay pressures. The interplay of these factors increases the likelihood of another hike or an extended hold at 2.00%, making near-term cuts less probable and maintaining Euro yields and rate expectations in a stable position. On the US side, the Fed has already cut by 25 bps, taking policy into a 3.50%–3.75% range, and weekly jobless claims hovering around 245,000 confirm a cooling labor market. November CPI at 2.7% year-on-year and core at 2.6% came in significantly below expectations, strengthening the notion that 2026 is likely to see more easing from the Fed instead of a tightening cycle. The disparity in policy is evident: the ECB maintains a 2.00% rate with potential upward pressure, whereas the Fed has shifted its stance and is being anticipated for additional cuts. The foundation of the medium-term uptrend in EUR/USD is established here.
The recent decline in EUR/USD to approximately 1.1710 was primarily triggered by France’s declaration that Parliament will not meet the year-end budget deadline, necessitating a rollover law to extend the 2025 budget into the following year. Given that French debt-to-GDP remains above approximately 112% and the recollections of the sovereign crisis linger in traders’ minds, any indication of fiscal dysfunction in a core Eurozone nation impacts the Euro immediately. However, the response thus far remains measured, rather than indicative of a chaotic repricing. The price has approached a significant support area that various analysts are monitoring: 1.1710 from the VT Markets movement, the 1.1715–1.1730 range identified in intraday assessments, and the wider 1.1650–1.1685 zone that aligns with the 21-day EMA, an upward trendline, and previous resistance that has now become support. Provided that EUR/USD remains above approximately 1.1650 on a closing basis, the situation in France presents headline risk within a bullish framework, rather than indicating a shift in regime. The options markets indicate this trend: one-month implied volatility has increased to approximately 7.8%, which provides an incentive for straddle buyers, yet remains distant from levels indicative of a crisis. This aligns with a situation characterized by erratic, amplified fluctuations in limited year-end liquidity, rather than a significant trend decline.
The US Dollar Index is hovering near 98.50, marking a three-day winning streak; however, the strength of that rebound appears to be lacking. Michigan Consumer Sentiment has seen an uptick from 51.0 to 52.9, which is marginally under the anticipated 53.4. Meanwhile, weekly jobless claims remain near 236,000, despite a decrease of 13,000 from the previously revised figure. The movement in DXY appears to be more of a position adjustment as we approach year-end rather than the initiation of a new bullish trend for the USD. For EUR/USD, this indicates a phase of consolidation instead of a definitive reversal. Short-term flows may limit the pair below 1.18 during DXY spikes on light data days. However, the broader macro environment — characterized by softer US inflation, a Federal Reserve already in a cutting phase, and no imminent cuts from the ECB — suggests that the next significant 500-pip movement is more probable to be upward rather than downward. As we approach the holiday season, the data is becoming less abundant; however, the information that is still available holds significant value for determining optimal entry points. The second estimate of US Q3 GDP, projected at approximately 3.8% on December 23, may provide a temporary boost to the dollar if growth exceeds expectations. However, with the CPI at 2.7%, the prevailing narrative leans more towards a balanced scenario rather than one of overheating. Attention will be given to the ADP weekly employment data, as any signs of renewed softening could bolster expectations for cuts in 2026 and provide support for EUR/USD during dips. The FOMC minutes scheduled for December 30 represent a crucial document.
The markets will analyze the extent of support for the recent 25 basis points cut and the Committee’s willingness to expedite easing measures should inflation remain around 2.5%–2.7%. Any indication that is more dovish than the existing pricing will drive EUR/USD towards the upper boundary of the range. Regarding the Euro, the key takeaway is the lack of expectations for cuts. Market pricing does not reflect any significant expectations for an ECB cut in early 2026. Lagarde’s reluctance to provide a definitive path, along with the revised inflation forecast for 2026, suggests that the 2.00% deposit rate may remain persistent. That is precisely what Euro bulls desire: a central bank that is distant from an easing cycle, while the Fed is already engaged in one. The movement in prices validates the overarching narrative. The EUR/USD pair has been establishing a series of higher highs and higher lows from the 1.15 area, supported by ascending moving averages. The initial push reached the 1.1760–1.1800 range, marking a target that has been both tested and upheld. The recent decline from just below 1.18 to 1.1710 represents typical profit-taking at previous resistance levels, rather than indicating a fundamental shift. The support ladder presents a clear downside. The 1.1715–1.1730 range serves as the immediate intraday support; a breach of this level creates potential for further movement but does not inherently negate the prevailing trend. The 1.1650–1.1685 zone represents a pivotal tactical buy area, characterized by the convergence of the 21-day EMA, the short-term rising trendline, and previous breakout levels. Below that, 1.1615–1.1630 represents a significant support level that medium-term participants will monitor closely should thin market conditions lead to a downturn. At the base of the structure lies 1.1500, positioned near the 200-day moving average. A clean break there would undermine the existing bullish outlook. On the topside, 1.1750 represents the initial level to reclaim, while 1.1800 serves as the psychological cap that has already been tested.
A daily close above this level would facilitate additional momentum. Exceeding 1.18, resistance appears to be minimal until reaching the September 2025 peak around 1.1920, with 1.2000 identified as the subsequent macro target. With RSI positioned in a neutral range instead of overbought, EUR/USD has the potential to move higher once this consolidation phase concludes. The existing combination — French political risk, an ECB maintaining a hawkish stance at 2.00%, a Fed in a cutting phase at 3.50%–3.75%, and a DXY rebound towards 98.50 — establishes an asymmetric profile for EUR/USD. The macro and technical indicators suggest purchasing on dips; however, the headline risks stemming from Paris and the year-end liquidity call for a more cautious approach and a more strategic structure. For directional traders, the clear strategy is to go long on EUR/USD during pullbacks into the range of 1.1685–1.1710, with invalidation set just below 1.1615 and an initial profit target near 1.1800. The proposed setup entails a risk of approximately 70–90 pips, with potential targets ranging from 90–200 pips, contingent upon the take-profit levels being established at 1.1800, 1.1920, or ultimately at 1.2000. The volatility profile provides options traders with greater nuance. Short-dated puts positioned around or just beneath 1.17 serve as a hedge for Euro-long portfolios, protecting against an abrupt expansion in French spreads. Call spreads aimed at the 1.18–1.19 range, financed by the sale of further out 1.21–1.22 calls, enable engagement in potential gains while mitigating excessive costs associated with tail risk. For individuals hesitant to commit to a specific direction regarding the French budget narrative, one-month at-the-money straddles priced around 1.17–1.18 offer a way to capitalize on a potential breakout from the existing compression. The implied volatility, currently at approximately 7.8%, remains a sensible consideration in light of the macro event risks anticipated in the coming month. Considering the essential figures — EUR/USD is currently trading between 1.1710 and 1.1740 after failing to breach 1.18 on its initial attempt, the ECB maintains a rate of 2.00% while Eurozone inflation remains above 3%, the Fed has already adjusted to a range of 3.50% to 3.75% with CPI at 2.7% and softening jobless data, DXY is hovering around 98.50, Germany’s PPI stands at –2.3% year-on-year, and a support level begins at 1.1715 extending down to 1.1650 — the likelihood leans towards the Euro. The pair is experiencing a bullish trend, currently facing a politically influenced year-end pullback within the 1.15–1.20 range. This presents a favorable buy-the-dip opportunity for EUR/USD, with a defined risk threshold set below 1.1615. The initial upside target is at 1.18, followed by 1.1920 and 1.20, contingent on any further strengthening of the 2026 Fed-cut expectations.