Dollar Maintains Upper Hand Over Euro on Safe-Haven Flows
In the short term, EURUSD reflects the divergence in policy cycles and the relative resilience of the U.S. economy, which continues to tilt the balance in favor of the USD. The market is not focused solely on current interest rate levels, but rather on expectations for rates over the next 3–6 months. At this point, the USD still holds a clearer advantage over the EUR.
The USD remains strong in the near term because the Fed has not yet been forced to ease policy rapidly, while the ECB is constrained by growth considerations. In the U.S., headline inflation is holding around 2.7% y/y, while core inflation remains near 2.6% y/y, indicating that underlying price pressures have not cooled sufficiently for the Fed to pivot early. Notably, housing costs are still rising above 3% y/y, highlighting persistent services inflation. At the same time, the U.S. labor market remains relatively stable, with the unemployment rate around 4.4% and average hourly earnings growing close to 3.8% y/y – levels that are sufficient to sustain domestic demand. This backdrop allows the Fed to remain more patient rather than rushing into early rate cuts in 2026. The prospect of higher-for-longer yields relative to the rest of the G10 alone continues to provide an important anchor for the USD.
Meanwhile, the Eurozone is entering a phase in which growth has become the primary constraint on monetary policy. Recent data suggest that the recovery remains weak and uneven, with Eurozone GDP growing at below 1% y/y, reflecting fragile domestic demand and high sensitivity to financing conditions. Although headline inflation has eased back toward 2%, core inflation is still around 2.3%, and this improvement is occurring alongside subdued growth, making it difficult for the ECB to maintain a restrictive stance for an extended period. As a result, even if the ECB does not signal an overtly dovish shift, markets still have reason to expect that its easing cycle will begin earlier, or at least proceed faster, than that of the Fed, leaving the EUR less attractive from a yield perspective and at a disadvantage in attracting short-term capital flows.
During periods when markets are particularly sensitive to data, or when geopolitical uncertainty and financial risks remain elevated, the USD is typically favored due to its liquidity and reserve-currency status. Trade-related risks, including the possibility of the U.S. imposing tariffs on EU goods, can further reinforce defensive market sentiment. In such an environment, the USD tends to benefit as a safe haven, while the EUR faces additional pressure given the Eurozone’s already fragile growth outlook. This dynamic creates a persistent psychological headwind for EURUSD: even in the absence of a major shock, the USD is more easily accumulated during defensive phases, whereas the EUR requires a clear catalyst to gain traction.
So what would allow the EUR to strengthen? For a more sustainable recovery in EURUSD, two conditions would need to materialize simultaneously: U.S. data would have to weaken convincingly enough to force a shift in the Fed’s stance, and the Eurozone would need to deliver upside surprises relative to current expectations. In the near term, however, these conditions have yet to converge. In my view, this means that any rebounds in EURUSD at this stage are more likely to represent corrective moves rather than the start of a new bullish trend.
That said, this baseline scenario would be challenged if U.S. data were to deteriorate materially, particularly in employment or core inflation, prompting markets to reprice the timing and pace of Fed easing. Even in the absence of clearly weak data, a softer-than-expected signal from the Fed could be enough to pressure the USD, given the market’s sensitivity to interest rate expectations. In addition, a strong improvement in global risk appetite could undermine the USD’s safe-haven appeal, while any de-escalation in U.S. – EU trade tensions or constructive negotiation signals could help relieve the risk premium currently embedded in the EUR.
Overall, the short-term outlook for EURUSD remains largely driven by policy expectation differentials and the relative quality of growth between the two economies. As long as the Fed has sufficient justification to remain patient and the Eurozone remains constrained by growth, the EUR is unlikely to develop a compelling narrative for a sustained reversal. In this context, a cautious stance remains appropriate: EURUSD may recover at times, but a durable upward move will still require clearer confirmation from U.S. data or a decisive shift in Fed communication, signals the market is still waiting to see.
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