By Linh Tran, Market Analyst at XS.com
At present, the euro is being influenced by two opposing forces: on the one hand, expectations that the Federal Reserve (Fed) will soon begin a monetary easing cycle, and on the other, concerns over the fragile growth outlook in the Eurozone. This contrast makes it difficult for EURUSD to establish a clear and consistent trend.
Monetary policy remains the central variable. While markets expect the Fed to cut interest rates if U.S. economic data show sufficient cooling, the European Central Bank (ECB) is inclined to keep its deposit rate steady at 2%. This divergence allows the U.S.–Eurozone real yield spread to narrow, thereby providing short-term support for the euro.
Recent U.S. economic data have revealed a marked divergence. The ADP Non-Farm Employment report released on Thursday showed private-sector payrolls rising by only 54,000, well below expectations of 73,000 and sharply lower than the previous month’s 106,000. In addition, JOLTS job openings weakened, reflecting a slowdown in hiring demand. However, the ISM Services PMI remained above 50, signaling continued expansion in the services sector, which accounts for the largest share of the U.S. economy. This suggests that the U.S. economy is slowing, particularly in the labor market, but has not yet entered recession. Against this backdrop, expectations for Fed rate cuts have been reinforced, although the risk of a prolonged “higher-for-longer” stance remains if upcoming inflation or wage data surprise to the upside.
In the Eurozone, the economic picture is gradually improving but remains fragile. The manufacturing PMI has returned above the 50 threshold for the first time since early 2022, while the services sector continues to expand. Inflation has also moved close to the ECB’s 2% target, reinforcing the view that the central bank need not rush into further easing. Nevertheless, GDP growth remains modest, and the region is still highly vulnerable to energy shocks. Any renewed rise in TTF gas or Brent crude prices during the winter could quickly challenge the Eurozone’s growth prospects.
Geopolitical risks also remain a persistent headwind. The war in Ukraine shows no sign of resolution, while global trade tensions and political uncertainty continue to sway investor sentiment. In risk-off episodes, the U.S. dollar is typically favored as a safe-haven asset, putting downward pressure on EURUSD. Conversely, during risk-on periods, capital flows often return to Europe, lending support to the euro.
From a medium-term perspective, the outlook for EURUSD leans modestly positive. As long as the Fed signals readiness to cut rates while the ECB maintains a cautious stance, the euro has room to edge higher against the dollar. However, the scope for sustained or significant appreciation remains limited, given the Eurozone’s still-fragile growth structure and the narrowing margin of safety in global financial markets.
This week, markets will be closely watching the U.S. Non-Farm Payrolls (NFP) report due Friday. This will be a pivotal release, shaping short-term expectations for the Fed’s policy trajectory. A weaker outcome would strengthen the case for imminent rate cuts and provide a tailwind for EURUSD. Conversely, stronger-than-expected job and wage growth could restore the dollar’s advantage and push the pair into a corrective move.