EUR/USD Outlook: The Euro Approaches Yearly Highs Ahead of the ECB Decision

The EUR/USD pair has accumulated a streak of four consecutive bullish sessions, holding a gain above 1%, which shows that, for now, buying pressure has returned to the pair ahead of the year-end. This renewed upside momentum observed in recent sessions has been supported by the weakness of the U.S. dollar following last week’s central bank comments and by expectations of a neutral stance from the European Central Bank in this week’s decision. Both factors have driven a quick recovery in the euro in the short term, and as long as no surprises emerge from the ECB meeting, this buying pressure could continue influencing EUR/USD movements in the coming sessions.

Dollar Weakness Remains a Theme

Several sessions have passed since the Federal Reserve’s policy decision, in which the rate was reduced from 4.00% to 3.75%. For now, this is expected to be the last cut in the short term, as the CME Group probability model shows a 73.4% chance that the rate will remain unchanged for the January 28, 2026 meeting.

However, even without expectations of further immediate cuts, the market continues to respond to Fed Chair Jerome Powell’s comments, who indicated that no rate hikes are anticipated for 2026 and that additional cuts could be implemented if labor-market data continues to weaken. This suggests that next year may be characterized by a neutral or even lower rate environment, with very little probability of returning to the rate levels seen throughout 2025.

These comments have driven continued weakness in Treasury yields, especially the 10-year yield, which has fallen from recent highs near 4.2% to around 4.0%. The decline in yields reduces the attractiveness of these instruments, weakening demand from foreign investors who need dollars to buy bonds—further weighing on the U.S. dollar as the market adopts a more bearish tone heading into 2026.

Viewing movements in the DXY index, which compares the dollar’s strength against other currencies, it is clear that dollar weakness remains persistent: the index has quickly moved away from the psychological 100-point level and returned to the 98-point zone. This reflects growing loss of confidence in the U.S. currency and makes it difficult for the dollar to stabilize in the short term.

Source: TradingEconomics

In this environment, as the Fed’s lower-rate bias continues to weaken the dollar, other currencies—such as the euro—may keep recovering ground, as seen in recent sessions. Over time, if this trend continues, it could support consistent buying pressure on EUR/USD.

 

What to Expect from the European Central Bank?

The ECB’s rate decision will take place on December 18, and probability models continue to reflect a clear neutral stance, with an 85.8% likelihood that the deposit rate will remain at the current 2.00% level.

Source: ECBWATCH

This neutral outlook, consistent with recent ECB meetings, is partly explained by the moderate economic growth in Europe and the lack of clear evidence that inflation has moved away from its target range. This has led the institution to maintain a cautious stance and end the year with a neutral bias.

It is also important to highlight the interest-rate differential between the United States and Europe: 3.75% vs. 2.00%. Although at times this differential favors demand for U.S. assets, it is currently narrowing, which could improve the perceived stability of euro-denominated investments. If the ECB confirms a neutral stance, the narrowing differential could continue supporting stable euro demand, helping the EUR/USD recovery in the short term.

 

EUR/USD Technical Outlook

Source: StoneX, Tradingview

• Broad Lateral Range Holds: Since mid-June, EUR/USD has maintained a broad sideways range, with an upper boundary at 1.18202 and a lower boundary at 1.15104. Recent price movements have approached the upper end of this range, which coincides with the highest levels of the year. If buying pressure persists, the pair could break out of the range and begin a more relevant bullish trend in the coming sessions. However, as the price approaches resistance, short-term bearish corrections may also emerge.
   

• RSI: The RSI continues to trade consistently above the 50 level, showing buying momentum over the average of the last 14 sessions. However, the indicator is nearing the overbought zone (70), which may indicate excessive buying strength and create room for short-term corrections.
   

• MACD: The MACD maintains a positive histogram above the zero line, signaling that moving-average strength remains bullish. If this structure holds, it could reinforce stable buying pressure in the medium term.
   

Key Levels:

• 1.18202 – Key Resistance: Upper boundary of the broad sideways channel and a confluence with yearly highs. A sustained bullish breakout above this level could break the lateral structure and activate a new upward trend.
   

• 1.16869 – Nearby Barrier: A short-term neutrality zone that may act as a barrier during bearish corrections.
   

• 1.16143 – Final Support: This level aligns with the 50-period moving average. A move back toward this zone would reactivate a bearish bias and restore dominance to the wide lateral range in the coming sessions.
   

Written by Julian Pineda, CFA, CMT – Market Analyst

Follow him at: @julianpineda25