By Linh Tran, Market Analyst at XS.com
EURUSD staged a recovery toward the 1.1820–1.1830 area after a notable corrective move, reflecting both technical adjustment pressure and shifts in macroeconomic expectations, particularly those related to the US dollar.
From a fundamental perspective, the primary driver behind yesterday’s rebound did not stem from any marked improvement in the Eurozone outlook, but rather from the relative weakness of the US dollar, as the DXY edged lower toward the 97 level.
Following remarks from FOMC members yesterday, market attention has increasingly shifted toward expectations surrounding the Federal Reserve’s monetary policy outlook, rather than focusing solely on the current level of interest rates. As the Fed continues to emphasize a data-dependent stance and refrains from making firm commitments to keeping rates elevated for an extended period—combined with the fact that US inflation is no longer accelerating as sharply as before and growth indicators are beginning to show signs of divergence—expectations that the Fed may need to adjust its policy stance over the medium term have gradually taken shape. This development has made the US dollar’s yield advantage less firmly priced, thereby creating room for EURUSD to recover following its recent correction.
Meanwhile, the European Central Bank (ECB) continues to maintain a cautious stance. The Eurozone economy remains in a slow-growth environment, particularly within the manufacturing and export sectors, while core inflation has yet to return sustainably to the 2% target. This forces the ECB to keep policy in a delicate balance, insufficiently hawkish to drive a strong appreciation in the euro, yet not clearly dovish enough to exert meaningful downward pressure on the currency.
Interest rate differentials and expectations regarding the future policy path remain key drivers. In practice, the foreign exchange market tends to react more strongly to changes in expectations than to policy decisions that are already well anticipated. As long as confidence builds that the Fed may cut rates earlier or act more flexibly than the ECB, the US dollar is likely to remain under pressure, allowing EURUSD further upside potential even in the absence of particularly strong Eurozone economic data. Conversely, signals suggesting that US interest rates will remain anchored at higher levels for longer would reinforce a recovery in the US dollar, thereby weighing on EURUSD.
From a broader economic standpoint, neither the United States nor the Eurozone currently demonstrates a clear and decisive advantage. The US economy continues to show a degree of resilience, particularly in the labor market and consumer spending, helping the dollar avoid a structurally bearish trend. In contrast, while the Eurozone has managed to avert a deep recession, it continues to face long-term structural challenges such as low productivity growth and heavy reliance on global trade. These factors limit the euro’s ability to become a leading trend-driving currency, instead positioning it primarily as a counterbalance during periods of US dollar weakness.
Global risk sentiment also plays a meaningful role in shaping the outlook for EURUSD. With financial markets remaining sensitive to geopolitical and fiscal risks, any increase in defensive positioning could prompt capital flows back into the US dollar, thereby capping EURUSD’s recovery. Conversely, if a risk-on environment persists, safe-haven demand for the dollar may ease, allowing the pair to hold at higher levels.
Taking all these factors into account, my personal view is that the current rebound in EURUSD is better characterized as a phase of correction and expectation rebalancing rather than a return to a sustainable uptrend. Any continuation of upside momentum will largely depend on whether the US dollar continues to weaken under shifting Fed policy expectations, rather than on a clear improvement in Eurozone fundamentals. As such, a cautious approach toward EURUSD is warranted at this stage, with close attention paid to upcoming US economic data and Fed communication to assess whether the current rebound has the foundation to extend or is likely to remain a short-lived recovery.