The EUR/USD pair is positioned around 1.1770–1.1810 as we approach the end of 2025, reaching a three-month peak just under 1.1810. This movement underscores the significant decline of the dollar, even in the face of a euro supported by merely moderate growth. Spot EUR/USD reached just below 1.1810 before retreating to around 1.1772. The significant observation is that rallies above 1.17 are now being sustained rather than sold off, a shift from the earlier part of the year. The recent shift indicates that the market has transitioned from engaging in a cyclical dollar upswing to evaluating the extent of a structural dollar repricing, particularly as rate and political risks increasingly challenge the US currency. The disparity in rates continues to be the most straightforward fundamental narrative for EUR/USD. The European Central Bank has maintained its deposit facility at 2.0%, while headline euro-area inflation hovers around 2.15%, with projections adjusted marginally upward, primarily driven by the services sector. The signal is “on hold, not easing fast,” which effectively strengthens the euro’s support level. Conversely, the Federal Reserve has reduced its policy rate from 4.00% to 3.75%, and the market continues to anticipate at least three more cuts by 2026. The front-end yield advantage of the USD diminishes each quarter, prompting investors to shift their allocations toward euro-denominated assets. Banks, in their forward-looking assessments, indicate that the EUR/USD may trend toward the 1.24 area by the end of 2026 based solely on this differential, despite potential volatility along the way.
The current speculative futures positioning indicates the extent to which this trade has become saturated. The long non-commercial EUR exposure has increased to approximately 145,000 contracts, rising from about 138,000 and currently reaching a two-year peak. The current positioning aligns with the EUR/USD zone around 1.18. However, it heightens the risk that any letdown regarding Fed-cut timing, ECB communication, or euro-area data could lead to a shakeout. From both a technical and psychological standpoint, the 1.20 level presents significant resistance. Given the current positioning, the pair is susceptible to a potential washout of 100–150 pips back toward the 1.1650–1.17 range before any lasting breakthrough above 1.20 can be expected. The shorter-term structure in EUR/USD does not align as clearly with the bullish macro narrative. On the four-hour chart, the pair has completed one leg down to approximately 1.1702, rebounded to about 1.1737, and is currently in the process of establishing another downward impulse targeting the 1.1650–1.1645 range. Experts monitoring wave structure characterize this as an evolving third downside leg within an uptrend, with 1.1650 serving as the initial significant test of bulls’ commitment to uphold the movement from sub-1.15 lows. Momentum indicators support this caution: MACD on H4 remains below zero with its signal line trending downward, while intraday stochastic readings are positioned below 50 and indicate a downward trajectory, both aligning with the potential for additional pressure toward 1.1650 before dip-buyers re-enter the market.
Recent price movement near 1.18 in EUR/USD reflects previous instances where US economic data shifted the dollar’s direction within a few days. When non-farm payrolls previously printed 209,000 versus expectations near 183,000, the USD experienced a notable rebound after weeks of selling, leading EUR/USD to retreat from approximately 1.1800 toward the mid-1.17s. The current takeaway is straightforward: with the pair hovering around 1.18 and the market significantly long on euro positions, any unexpected positive data regarding US jobs, inflation, or growth could trigger a swift 50–100 pip correction, while still maintaining the overarching medium-term bearish outlook on the dollar. The challenges facing the dollar extend beyond mere relative interest rates; they now encompass issues of credibility and its status as a safe haven. In this phase, precious metals have effectively taken the place of the USD as the favored hedge. Spot gold has surged above $4,500 an ounce, with intraday spikes approaching $4,550 and a substantial 70% year-to-date gain, while silver has climbed toward the high-$70s per ounce. When both gold and silver reach all-time highs concurrently with EUR/USD climbing to 1.18, the market conveys a distinct message: the dollar is not regarded as the primary safe-haven asset. For cross-asset traders, this is significant because robust metals and a weakening dollar usually support one another; as long as gold remains above approximately $4,300 and the dollar index faces challenges, EUR/USD will attract dip-buyers more swiftly than in a conventional “USD as safe haven” scenario.
The same Federal Reserve dynamics influencing EUR/USD are also providing a distinct upward trajectory for XAU/USD. Market pricing indicates approximately an 82% likelihood that the Fed will maintain rates during its January 28, 2026 meeting. However, the probabilities for March are nearly evenly divided, with “unchanged” at around 46.7% and a 25 basis point cut that would adjust the policy rate to approximately 3.50%. The yields on US 10-year bonds have decreased from approximately 4.2% to around 4.1%. Each 10 basis point decline diminishes the opportunity cost associated with holding gold. Gold has demonstrated a strong three-month uptrend, with the RSI entering overbought territory above 70, while establishing a support cluster in the range of $4,200–$4,300. Provided that the band maintains its position and continues to decline, an achievable institutional target range starting at $4,700 and extending toward approximately $4,900 over a 6–12 month horizon is plausible. The metals backdrop presents an additional indirect challenge for the USD, thereby bolstering EUR/USD in the medium term, despite potential short-term corrections for the pair. The USD is now influenced by factors beyond just the anticipated number of rate cuts. A notable “risk premium” has emerged in the currency as investors express concerns regarding central-bank independence and the sustainability of long-term fiscal discipline. Despite the US Q3 GDP registering a notable 4.3% annualized growth—an increase from 3.8% and significantly surpassing earlier forecasts of around 3.3%—the dollar does not gain any advantage. The market is currently pricing in robust data while concentrating on the influence of future policy decisions, whether they will be shaped by economic factors or political considerations. The ECB’s cautious approach and hesitance to implement cuts contribute to the EUR being viewed as a symbol of institutional stability. The interplay between a politicised Federal Reserve and a technocratic European Central Bank is prompting asset allocators to shift marginal capital from the dollar to the euro. This trend is particularly evident as the strength in precious metals indicates that investors are actively hedging against US policy risk.
The current risk sentiment is favorable, yet it does not reach a state of euphoria. Broad equity sentiment gauges, including fear-greed style indices, have transitioned from the “fear” territory to the “greed” zone, currently around 58. However, this upward movement has begun to plateau as we approach year-end. The current midpoint sentiment regime for EUR/USD is optimal: the markets are not exhibiting panic towards the dollar, while simultaneously, there is not a strong risk-on sentiment prompting investors to abandon hedges and significantly shift back into US assets. As long as confidence remains within this neutral-to-positive range—sufficient to sustain inflows into European and global risk assets, yet not strong enough to restore the USD as the preferred safe haven—the euro maintains a structural advantage against the dollar. From a trading perspective, the EUR/USD landscape is constrained and uneven. On the downside, 1.1700–1.1730 has already served as a staging area for rebounds following the recent dip to approximately 1.1702; a definitive break below that range suggests a move toward 1.1650–1.1645, where both H4 wave projections and intraday momentum indicators align. A decisive close below 1.1650 would confirm the perspective that the current movement is more than merely a superficial retracement. On the upside, the initial resistance is the recent three-month high just below 1.1810, succeeded by the psychologically significant and positioning-influenced 1.20 range. With speculative longs crowded, every test of 1.18–1.20 risks being sold by fast money. However, medium-term investors observing the Fed–ECB spread will view dips to 1.17 and 1.1650 as opportunities to reload rather than as trend reversals.