EUR/USD forecast: Neutral ECB should keep euro’s downside limited

The EUR/USD was trading around 1.16 handle ahead of the ECB rate decision, bouncing back a tad following the Fed’s slightly hawkish press conference yesterday where Powell made it clear that another cut isn’t guaranteed. But risp appetite remains largely supported even if European markets pulled back a little this morning ahead of the European Central Bank rate decision shortly. US President Donald Trump called his meeting with China’s President Xi Jinping “amazing”, with both sides agreeing to roll back some export restrictions and trade barriers – though markets had more or less priced that in already, which is why we haven’t seen a major reaction. The focus remains on AI euphoria and tech earnings, keeping the bears at bay for stock markets. This is helping to cushion the downside risks for the EUR/USD forecast and other risk-sensitive currency pairs such as AUD/USD. The ECB is widely expected to hold policy unchanged and as such we don’t expect any dovish reaction in the euro, especially after this morning’s release of surprisingly strong French GDP data.

 

Analysis: don’t write off the euro yet

 

With the ECB likely to hold steady today and eurozone growth showing resilience, the single currency remains underpinned especially against the likes of the yen with the EUR/JPY today breaking out to a new high near 179.00 handle after a dovish hold by the Bank of Japan, making the EJ the best performing currency pair.  The euro is also holding firm against most other majors – it’s just the dollar’s current strength keeping it in check. Medium term, I’d still back the EUR/USD. A more hawkish ECB, firmer growth prospects, and German stimulus should all lend support. The short-term picture, though, will depend on how long the Fed’s hawkish afterglow lasts. Once that fades, EUR/USD could easily climb again. Personally, I don’t see it slipping much below 1.15 – and if it does, it won’t stay there for long.

 

Dollar takes a surprise boost from Powell’s press conference

 

Powell’s press conference made one thing crystal clear – there’s a bit of discord brewing within the Fed. That hint of internal division gave the dollar a lift, with markets trimming around 10 basis points off expected rate cuts. The greenback firmed most against the low-yielding yen and Swiss franc. Powell said that a December cut isn’t a “foregone conclusion,” which shouldn’t have surprised the market. But it did, and that knocked odds from nearly certain to a more balanced 70% for a December cut.

 

As a result, the dollar found support – particularly against the yen, where the Bank of Japan still seems reluctant to tighten. Meanwhile, China’s one-year delay in rare earth export controls offered global supply chains a welcome reprieve, but the impact of this on the dollar should be negative especially against the yuan, Aussie and kiwi. Beyond today’s jobless claims, the ongoing US government shutdown has left the data calendar fairly sparse, meaning markets will take their cues from general risk appetite now that the dust settles on FOMC’s rate cut and Powell’s slightly hawkish commentary.

 

EUR/USD forecast ECB in focus as French GDP surprises and Germany stagnates

 

For the EUR/USD forecast, the focus now shifts to the euro side of things. This morning’s Eurozone growth figures brought a pleasant surprise – at least from France. Despite political uncertainty, French GDP accelerated 0.5% quarter-on-quarter, easily topping forecasts. The contrast with Germany, however, couldn’t be starker. Europe’s industrial powerhouse flatlined in Q3, though a technical recession was narrowly avoided. All hope for Berlin now lies on the government’s hefty €500 billion fiscal package, aimed at infrastructure and defence. It’s substantial, but its impact might be slower to filter through than hoped.

 

Apart from Germany, most other Eurozone countries showed decent growth figures. As a whole, the Eurozone managed a 0.2% growth for the quarter.

 

All eyes now turn to the European Central Bank meeting. Christine Lagarde is unlikely to spring any surprises; the market still leans slightly towards another rate cut at some point in the middle of 2026, but for now she’ll probably play it safe and that should help to keep the EUR/USD forecast slightly titled to the upside despite the dollar’s recovery.

 

EUR/USD technical analysis and key levels to watch

 

 

Technically, EUR/USD exchange rate looks capped near 1.1650 for now, where the resistance trend of its bearish channel comes into play. A clean break above this level would re-instate the EUR/USD bullish forecast. On the downside, 1.1570ish is the top of its long-term support range between 1.1460-1.1570. While I wouldn’t rule out the potential for a dip inside this support zone in light of the hawkish-leaning FOMC press conference yesterday, much will now depend on the tone of the ECB chair Christine Lagarde.

 

 

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R