EUR/USD enters January 2026 trading within the 1.17–1.18 range, concluding December at approximately 1.1738–1.1763 following multiple unsuccessful efforts to maintain a position above the 1.1800 psychological threshold. At the beginning of December, the pair was positioned around 1.1585, indicating that the market has gained approximately 180–200 pips within a single month and about 13% over the past year, recovering from a low near 1.0400 established a year ago. The pair continues to exhibit a distinct bullish trend; however, the price is currently facing significant multi-year resistance, making further upward movement more challenging and increasing the likelihood of corrective actions within the prevailing uptrend. The Federal Reserve’s approach to the USD is straightforward: the easing cycle has commenced, yet there is a division within the committee regarding the extent of its progression. In December, the Fed executed its third 25 basis point reduction of 2025, lowering the federal funds range to 3.50%–3.75%. The current range is characterized as approximately neutral instead of explicitly restrictive, and the most recent dot plot indicates a broad array of perspectives regarding the trajectory for 2026, rather than a concentrated grouping.
The futures markets are currently indicating the likelihood of approximately two additional cuts in 2026. There is about a 60% probability associated with a potential move at the meeting on 26 March, and roughly 77% odds that the Federal Reserve will implement at least two rate reductions throughout the year. The likelihood of a reduction as soon as January stands at approximately 15%, which explains why the USD has experienced a structural weakening without facing an outright collapse. The division within the committee is significant. One faction advocated for a more substantial, “jumbo” reduction during the previous decision, whereas another group favored maintaining the status quo. The division is significant for EUR/USD, as each labor and inflation report now holds the potential to influence expectations. Weekly jobless claims most recently came in at 199K versus forecasts around 219K and a prior reading of 215K, indicating that the labor market remains tighter than what a significant cutting cycle would typically warrant. The Federal Reserve is demonstrating a readiness to tolerate inflation levels exceeding 2% for an extended period. The net result indicates a structural inclination towards a weaker USD extending into 2026, punctuated by significant counter trend rallies whenever US data presents unexpected strength. The US Dollar Index is currently positioned at approximately 98.25, just shy of a recent peak around 100.40. However, it is projected to conclude the year with a decline of about 10%, marking its weakest annual performance in nearly eight years. DXY is currently constrained within a range defined by its 50-day exponential moving average around 98.10 and the 200-day exponential moving average situated in the vicinity of 98.60. Immediate resistance is observed at 98.36, followed by the next level around 98.74. The RSI just below 60 indicates moderate positive momentum, yet it does not suggest an overbought condition. A decisive push through 98.74 would confirm that the dollar has established a short-term floor, potentially driving EUR/USD back towards the low 1.17s, with the possibility of testing the 1.16 handle if the move extends. A clean break below 98.00 on DXY would pave the way for EUR/USD to challenge and potentially exceed the 1.1800–1.1840 resistance zone. Currently, the index structure suggests a volatile, two-sided market instead of a straightforward decline in the dollar.
The European Central Bank delivers the second component of the divergence that is significant for EUR/USD. The ECB concluded 2025 with policy rates steady, while staff projections indicate that inflation is expected to remain around 2% until 2028. The projection for inflation in 2026 has been adjusted upwards by approximately 20 basis points, yet it remains aligned with the target, indicating that decision-makers are generally at ease with the existing approach. Growth projections for the euro area experienced a slight upward adjustment, with emphasis placed on the notion that domestic demand — bolstered by increased infrastructure and defense expenditures — is anticipated to serve as the primary driver of growth in the years ahead. Money markets indicate a probability of less than 10% for a 25 basis point cut by February 2026, suggesting that investors do not foresee the ECB following the Fed on the easing trajectory in the immediate future. With the Fed already at 3.50%–3.75% and markets pressing for more cuts, while the ECB holds steady, the rate differential continues to lean in favor of the EUR going into 2026. The configuration of that policy is precisely the reason EUR/USD has risen from 1.0400 to the present range of 1.17–1.18, even amidst ongoing political turbulence on both sides of the Atlantic. The political landscape adds an additional layer of complexity to the narrative surrounding the USD. President Trump is poised to have the chance to appoint a new Chair to replace Jerome Powell in May 2026, and market participants are already factoring in the likelihood that the successor may adopt a more dovish stance than the current leader. Recently, Powell has cautioned that the monthly non-farm payrolls may be exaggerating job creation by approximately 60K each month. This suggests that the Fed will place greater emphasis on overall labor trends rather than on any individual report. If employment figures remain robust and inflation hovers around 3.0%–3.5% rather than aligning precisely with the 2.0% target, it will compel markets to reassess some of the anticipated rate cuts for 2026. This kind of repricing would bolster the USD and likely maintain EUR/USD below 1.20 for an extended period, much to the dismay of euro bulls.
The alternative scenario, characterized by a distinct slowdown in labor data and milder inflation, would strengthen the existing bearish trend for the USD and provide the EUR/USD with the opportunity to break through the multi-year resistance level. From a technical standpoint, EUR/USD continues to exhibit a higher timeframe uptrend that initiated when the pair consolidated around 1.0400. However, the latest ascent from 1.1585 to repeated tests of 1.1800 has been rapid and tightly packed in duration. For January, a plausible speculative range is established between 1.16850 on the lower end and 1.18400 on the upper end. The pair concluded the year in the range of 1.1738–1.1763, slightly above the 50-day exponential moving average, which is approximately 1.1730, while the 200-day exponential moving average provides further trend support in the vicinity of 1.1705. On multiple daily and intraday analyses, the RSI is trending down towards 40, suggesting diminishing momentum and the possibility of consolidation, though it has not yet confirmed a reversal of the overall uptrend. A sustained close above 1.1765 serves as the initial significant signal for renewed buying momentum. Breaking through that level would bring 1.1800 back into focus and set the stage for a challenge of the upper band around 1.1840. The identified levels align with the peaks that hindered upward movements in July and once more in Q3 2025, suggesting a significant supply presence above 1.18. The initial support level is located at the 1.1730 zone, which corresponds with the 50-day EMA. A decline beneath that level would reveal the 1.1705 zone, aligned with the 200-day EMA, which serves as a critical threshold distinguishing a robust corrective phase from a more significant trend reversal. Should the price drop below 1.1705, attention will turn to the lower boundary of the January projection at approximately 1.16850, succeeded by a concentration of previous interest in the vicinity of 1.1665–1.1650, which numerous discretionary strategies are already employing as a rational target. The present calendar is significant for trade execution. Holiday schedules lead to reduced liquidity, amplifying the noise in the critical ranges between 1.1760 and 1.1780.
In late December, EUR/USD briefly exceeded 1.1800 on several occasions before retreating, a common occurrence indicative of stop hunting when trading volumes are low. In such market conditions, short-term traders typically find greater success by fading extremes instead of pursuing breakouts. A strategic approach that remains viable as EUR/USD fluctuates beneath long-term resistance is to sell spikes approaching 1.1780, aiming for a target around 1.1650, with a protective stop placed slightly above 1.1830. This strategy adeptly capitalizes on selling at the peak of the existing range and repurchasing close to the lower boundary, consistent with the 1.16850–1.18400 framework and the prevailing stance in DXY. Simultaneously, medium-term investors aiming to align with the overarching fundamental trend are likely to wait for clearer pullbacks towards 1.1705–1.1685 to establish long positions. Integrating the macroeconomic landscape with the technical analysis results in a definitive position. The Federal Reserve is positioned at 3.50%–3.75% with anticipated cuts ahead, while the European Central Bank remains effectively on hold as inflation approaches its target. The DXY has declined nearly 10% year over year, while the euro has appreciated approximately 13% and stands about 17% above its recent lows. The prevailing conditions continue to support a stronger EUR/USD outlook through 2026, with 1.20+ appearing to be a plausible medium-term target as the market adjusts to the existing overbought scenario. The strategy is to avoid pursuing strength within the range of 1.1765–1.1800, as the risk-reward ratio becomes unfavorable. The more strategic approach is to consider EUR/USD as a Buy on dips, rather than a Sell or neutral Hold. The ideal area for accumulation continues to be the 1.1705–1.1685 range, with risk clearly delineated below 1.1650. The focus on the upside is a sustained breakthrough above 1.1840, which would open up the 1.1950–1.2000 zone as the subsequent phase of the cycle.