EUR/USD: Divergent Policy Paths and Shifting Momentum

10 November 2025

Macro Overview

The macro environment entering the final quarter of 2025 presents contrasting trends across major economies. In the Eurozone, modest improvements in industrial production and business sentiment signal the end of a shallow technical recession. Consumer confidence has stabilised, helped by disinflation and steady labour-market conditions. Yet household demand remains fragile, as rising mortgage costs and fiscal tightening weigh on real incomes. Germany shows early signs of recovery, while southern Europe continues to outperform marginally.

Across the Atlantic, the U.S. economy has begun to cool, particularly in housing and manufacturing, though overall growth remains near potential. A softening labour market is visible in declining job openings and slower wage gains, but headline employment remains strong enough to delay aggressive Fed easing. Commodity prices have steadied, limiting imported inflation pressures and reducing volatility in exchange-rate expectations.

From a technical perspective, EUR/USD remains range-bound, oscillating between clearly defined support near 1.14 and resistance at 1.19. Momentum indicators have flattened, while positioning data show that speculative euro shorts have been reduced. The 200-day moving average near 1.15 acts as a key pivot; a sustained break above 1.17 could open the path to 1.20, whereas a move below 1.14 might revive bearish sentiment.

Monetary Policy Environment

Policy divergence continues to dominate the FX narrative. The Federal Reserve maintains its policy rate near 4 %, balancing the risk of overtightening against lingering inflation persistence. Policymakers acknowledge that disinflation is

advancing, but remain wary of declaring victory. Forward-rate markets now imply a first Fed rate cut around mid-2026, roughly 120 basis points of easing over twelve months.

The European Central Bank, conversely, has already initiated an easing cycle, cutting the deposit facility rate to 2.00% in June 2025 and signaling its willingness to act further if growth falters. However, ECB officials emphasise that monetary policy will stay “restrictive for as long as necessary” to anchor inflation expectations.

Real-rate differentials remain tilted in favour of the U.S., explaining the dollar’s resilience. Nonetheless, the narrowing gap between headline inflation and policy rates suggests that both central banks are approaching a policy inflection point. As this convergence unfolds, the dollar’s cyclical advantage is expected to diminish gradually.

Regional Market Performance

Currency and capital markets have reflected these divergent fundamentals. European equities have regained moderate traction as risk appetite improves, although the remains well below its early-2025 highs. Corporate earnings have been broadly resilient, but margin pressure persists in energy-intensive sectors. Government bond yields have declined as the ECB’s dovish tone reassures investors.

In the United States, equities continue to outperform, fuelled by technology and consumer-discretionary sectors, while Treasury yields have retreated on expectations of a slower tightening path. These dynamics have kept U.S. assets attractive for international investors, supporting the dollar despite the narrowing yield spread.

Emerging-market currencies have stabilised, benefiting from the lull in dollar strength and falling volatility. Nevertheless, sentiment remains fragile, with carry trades concentrated in high-yielding currencies of limited liquidity.Against this backdrop, EUR/USD volatility has compressed to multi-year lows, suggesting a market in wait-and-see mode ahead of key policy signals.

Investment Strategy Highlights

Strategically, investors should maintain tactical flexibility. The current environment favours range-trading strategies and partial currency hedges rather than directional bets. Short-term traders can exploit the 1.14–1.19 corridor, building exposure near support and trimming positions close to resistance. Option markets indicate a moderate preference for euro calls, reflecting medium-term optimism once the Fed begins easing.

Carry-trade dynamics remain marginally dollar-positive, yet this advantage will likely fade as interest-rate convergence accelerates in 2026. Institutional portfolios may consider increasing euro hedging ratios to protect against short-term dollar strength while preserving upside potential.

Long-term investors should monitor the evolving macro mix: declining U.S. real yields, recovering European credit conditions, and potential fiscal coordination in the Eurozone could shift the balance in favour of the euro over the next 12–18 months. However, patience and disciplined risk management remain essential, as the pair’s volatility floor is unlikely to fall much further from current levels.

Conclusion

EUR/USD remains the most policy-sensitive major currency pair, capturing the global tug-of-war between resilience and recovery.

In the short term, the dollar is supported by stronger growth and relatively higher real yields, but structural factors point to a gradual euro comeback as policy and inflation differentials converge.Market participants should remain attentive to upcoming inflation releases, ECB communications, and any shift in Fed language that could redefine expectations heading into 2026.