Key points for the Euro 2025 H2 outlook
- Euro set to close the year up more than 13%, near four-year highs
- Federal Reserve to emphasize jobs outlook- markets pricing another 50bps in cuts
- ECB likely on hold as inflationary pressures ease- growth prospects improve
- Outlook constructive into 2026- EUR/USD coiled below pivotal resistance- risk rises for correction within broader uptrend
Euro surged more than 17% off the yearly lows with EUR/USD exhausting into pivotal resistance in Q3 at multi-year highs. Price has been coiling just below, and the focus is on a breakout into the yearly cross with the broader outlook still constructive into 2026.
Federal Reserve in the Spotlight
FOMC Interest Rate Dot Plot
Source: FOMC
In December, the Federal Reserve cut interest rates for a third time in 2025 with benchmark rate closing the year at 3.50%-3.75%. The updated Summary of Economic Projections shows the committee remains deeply divided on the path of monetary policy with the interest rate dot-plot distribution widening out. Despite an improved growth outlook and softening inflation, Federal Reserve Chairman Jerome Powell suggests the next move will likely be lower with rates now ‘generally in the range of neutral’. Fed fund futures are pricing a 60% probability the next rate-cut will be at the March 26 meeting.
FOMC Summary of Economic Projections
Source: FOMC
While the Committee acknowledged tensions on both sides of the dual mandate, labor market data will be critical in shaping the interest rate outlook for next year. Notably, Chair Powell suggested in the latest press conference that monthly jobs figures may be overstated by nearly 60K, increasing the likelihood that policymakers will place greater weight on labor trends. With the central bank showing a willingness to tolerate a longer period of above-target inflation, the real threat to the 2026 outlook would be unexpected strength in the jobs market. Ultimately, it may take better-than-expected labor data to slow the USD bears.
Fed Fund Futures- FedWatch Tool
Source: CME
Markets are now pricing a 77% probability the Fed will cut at least twice next year, with a 47% chance they will deliver three-cuts. Keep in mind Chair Powell will be ending his term in just a few months, and while his successor is likely to lean more dovish, the easing may still be limited in scope if the economy continues to outperform. Keep in mind the impact of President Trump’s key legislative accomplishment, the Big Beautiful Bull, are going to be felt early in the year with estimates this could be the largest tax-refund season in history. Bottom line: the risks to the Fed outlook are stronger jobs, or hotter inflation. Aside from surprises in one of these two components, rates are heading lower next year. For the US Dollar, traders have largely priced two cuts– the focus is on a how far off the market is from what the Fed delivers. Stronger US data might start to be good for the US Dollar again.
ECB Outlook: Rates Likely on Hold in 2026
Source: ECB
The ECB left interest rates unchanged in December, with updated staff projections showing a modest upward revision to the Euro area growth outlook. President Christine Lagarde emphasized that the Governing Council sees “domestic demand as the main engine of growth in the years ahead,” noting that increased government spending on infrastructure and defense should continue to support activity. While the 2026 inflation forecast was revised 20 basis points higher, the broader projection continues to place inflation near the 2% target through 2028. Overall, the ECB appears comfortable with its current policy stance, and rates are likely to remain steady through next year.
Source: ECB
With the ECB on hold and the Fed expected to ease further, the interest rate disparity is likely to be supportive for the Euro next year. Yet the advance remains captive to a key technical hurdle, and the focus into the yearly cross is on a breakout above pivotal resistance to fuel the next leg of the multi-year uptrend in EUR/USD.
--- Written by Michael Boutros, Senior Market Analyst
Follow Michael on X @MBForex
