By Linh Tran, Market Analyst at XS.com
The EURUSD pair is facing significant downward pressure as the U.S. dollar continues to be supported by safe-haven flows and expectations that the Federal Reserve (Fed) will temporarily maintain a stable monetary policy stance amid the ongoing U.S. government shutdown. Meanwhile, the European Central Bank (ECB) is struggling with the prospect of prolonged economic stagnation. After a period of consolidation, EURUSD has slipped below 1.17, reflecting the widening divergence between the U.S. and eurozone economies.
In the United States, despite the government shutdown, recent indicators such as the ISM Manufacturing Index and consumer confidence data suggest that the economy has retained a certain degree of resilience. Meanwhile, U.S. Treasury yields have slightly declined but remain relatively elevated, allowing the dollar to maintain its strength against most major currencies.
By contrast, the eurozone’s economic outlook remains subdued. According to Eurostat, GDP in Q2 2025 rose by only 0.1% quarter-on-quarter, while PMI surveys in Germany and France continue to show weakness in the manufacturing sector. Although headline inflation across the bloc has eased close to 2%, weak consumer demand, slowing credit growth, and the risk of a technical recession are making it difficult for the ECB to maintain a hawkish stance. If growth fails to improve soon, the ECB may be forced to consider another small rate cut in early 2026 — a move that would exert further downward pressure on the euro.
In addition, political and fiscal tensions within Europe continue to weigh on investor sentiment. Disputes over national budget plans — particularly in Germany and Italy — have raised concerns about the EU’s ability to enforce common fiscal discipline. Meanwhile, sovereign bond yields in peripheral countries such as Italy and Spain are rising faster than those in Germany, widening yield spreads and signaling a potential re-emergence of systemic risks within the region.
On the other hand, while the DXY index remains at relatively low levels, it is consolidating within the 97–98 range, suggesting that the U.S. dollar continues to benefit from its safe-haven status amid persistent geopolitical uncertainty — especially as the ceasefire agreement between Israel and Hamas remains fragile. As capital continues to flow toward safer assets, the greenback is likely to retain its strength against the euro, particularly given that the nominal interest-rate differential between the two regions remains significant.
However, it is important to note that the U.S. government shutdown has delayed the release of several key economic reports, leaving assessments of the U.S. economy somewhat unclear. In the coming weeks, if the delayed data point to a sharp slowdown, it could prompt the Fed to begin an easing cycle later this year, thereby reducing the dollar’s appeal. Conversely, if the data show a more moderate slowdown, the dollar would likely maintain its relative advantage over the euro.
At present, the short-term trend for EURUSD remains bearish. With the Fed maintaining a cautious but not yet accommodative stance, while the ECB faces limited policy space and weak growth momentum, the outlook for the euro in Q4 2025 remains subdued.
In the longer term, a sustained recovery in EURUSD will only be possible once the eurozone shows clearer signs of economic improvement or when the Fed formally shifts toward a rate-cutting cycle. Until one of these catalysts emerges, the U.S. dollar is likely to maintain its upper hand, while the euro remains under downward pressure in the months ahead.