By Linh Tran, Market Analyst at XS.com
EURUSD continues to maintain its recovery momentum as the USD weakens after expectations that the Fed will begin its rate-cutting cycle are reinforced, while the macro environment in Europe shows signs of stabilizing but remains far from solid. The current movement reflects a recalibration of interest-rate and growth expectations between the two economies, rather than a shift clearly favoring the Euro.
According to Eurostat, annual HICP inflation in the Eurozone is moving closer to the ECB’s 2% target (October inflation at 2.1%). This comes as price pressures from energy decline, while services and wages continue to play a dominant role in the inflation structure. In its Spring 2025 Forecast, the European Commission estimates that real GDP in the Eurozone will grow by only around 0.9% in 2025, before inching up to about 1.4% in 2026, indicating a relatively modest recovery trajectory.
Business activity has shown signs of improvement in survey data as the HCOB Eurozone Composite PMI rose to 52.8 in November 2025 from 52.5 in October, marking the highest level in 30 months and the sixth consecutive month above the 50-point threshold, indicating that the corporate sector is broadly returning to expansion. However, this improvement is largely driven by the services sector (services PMI at 53.6), while manufacturing remains sluggish.
Overall, the internal growth momentum of the Eurozone remains weak, especially in Germany, and is not strong enough to create a compelling medium-term growth story for the Euro.
The ECB has significantly cut rates from previous peaks but is now shifting to a cautious, data-dependent stance. After multiple reductions since the second half of 2024, the ECB’s deposit facility rate currently stands at 2.00%, the main refinancing rate at 2.15%, and the marginal lending rate at 2.40%, effective from June 11, 2025. Minutes from recent meetings and statements from policymakers indicate that the ECB is not in a hurry to cut further, as it aims to preserve policy space should inflation unexpectedly undershoot in the coming period. This shows that interest rates are no longer a major drag on growth, but are also not “hawkish” enough to serve as a primary driver for a sustainable uptrend in the Euro.
On the USD side, the Fed is the more decisive factor for EURUSD at this stage. After maintaining a restrictive stance for an extended period, the Fed brought its policy rate down to the 3.75%-4.00% range at its late-October meeting. The main reason stems from multiple signs of cooling in the U.S. economy, particularly in the labor market. The latest ADP report for November shows the private sector losing 32,000 jobs, contrary to prior expectations for a modest increase, and even reversing the revised +47,000 gain from the previous month. Earlier, the September jobs report also recorded a slowdown in hiring, with an increase of roughly 119,000 jobs and the unemployment rate rising to around 4.4%, the highest in four years. This series of data reinforces the view that the Fed is unlikely to maintain an overly restrictive stance.
The combination of declining U.S. interest rates and weakening labor data has eroded part of the USD’s yield-advantage over the Euro, even though the differential still favors the U.S. Market pricing (according to FedWatch) increasingly leans toward the possibility of another Fed cut in December, while the ECB signals a pause. This forms the basis for EURUSD’s short-term recovery.
However, looking further ahead, the fundamental backdrop still does not fully support the Euro. The European Commission’s official forecast shows Eurozone real GDP in 2025 at only around 0.9%, while unemployment is expected to stay near 6.3%. This highlights that the growth outlook and labor-market resilience of the U.S. remain stronger. Should the Fed act more cautiously and refrain from cutting as quickly as the market expects, the USD could regain part of its strength, putting renewed pressure on EURUSD.
Overall, the current recovery of EURUSD may continue to extend in the short term as expectations of Fed rate cuts strengthen while the ECB remains cautious awaiting further data. However, in the medium and long term, the Eurozone’s persistently weak growth, especially relative to the U.S. will remain a structural headwind for the Euro.