EUR Short-Term Rebound Supported by Fed Easing Expectations, But Medium-Term Advantage Still Favors the USD
The euro has recorded two consecutive sessions of recovery, pushing the EURUSD exchange rate to around 1.166, as market sentiment improves on expectations that the U.S. Federal Reserve (Fed) will accelerate its pace of interest rate cuts in upcoming meetings. Capital outflows from the U.S. dollar — which had strengthened sharply during the recent risk-off phase — are providing room for the euro to rebound, even though the fundamental backdrop for the common currency remains fragile.
The policy divergence between the Fed and the European Central Bank (ECB) remains the key driver of the pair’s direction. After more than two years of tightening, the Fed has begun its first easing cycle, with another 25-basis-point cut likely in October if incoming economic data continue to soften. Meanwhile, the ECB maintains a cautious stance, signaling that it needs more evidence of sustainable disinflation before taking more decisive action. This divergence means that both nominal and real yields in the U.S. are falling faster than in the euro area — a factor that temporarily supports the euro’s rebound.
However, the Eurozone’s underlying economic picture is still too weak to sustain a prolonged rally. GDP growth in Q2 expanded by only +0.1% quarter-on-quarter, effectively flat, while the composite PMI remains around the neutral 50 mark — indicating a fragile recovery across both services and manufacturing. Key economies such as Germany continue to struggle with weak exports and subdued domestic demand. Although inflation has eased considerably from its peak, the euro area remains under structural pressure, limiting the ECB’s ability to shift policy abruptly.
Conversely, the U.S. dollar faces growing challenges from fiscal and political risks at home. U.S. public debt has surpassed $37 trillion, and the ongoing government shutdown risks delaying several key macroeconomic releases, including CPI, PPI, and retail sales. The absence of timely data has created a “data fog,” weakening the Fed’s policy visibility and causing temporary loss of momentum for the dollar. Still, in periods of heightened uncertainty, the greenback can regain strength as a safe-haven asset, particularly amid escalating global trade and geopolitical tensions.
The U.S.–China trade conflict remains a crucial risk factor. Recent tariff-related announcements from both sides have reignited fears of a renewed trade war. Simultaneously, both economies are preparing to impose reciprocal port fees on each other’s shipping vessels — a form of “hidden tax” that could significantly raise global logistics costs. The International Monetary Fund (IMF) has warned that such retaliation could increase import prices into the U.S. by 0.7–1%, exacerbating structural inflation risks. In this environment, any escalation in trade tensions could push the dollar higher again due to its traditional safe-haven appeal.
Within the Eurozone, the trade surplus has improved, but the region’s competitiveness still depends heavily on stable supply chains and energy prices. Should global trade be disrupted, Europe is likely to suffer more than the U.S., given its high reliance on imported raw materials and intermediate goods. This structural vulnerability keeps investors cautious about making long-term bullish bets on the euro, despite recent short-term gains.
Overall, the short-term outlook for EURUSD leans mildly bullish if the Fed maintains a dovish tone in upcoming communications or minutes. However, in the medium term, the balance of advantage still favors the U.S. dollar, supported by relatively stronger economic growth and greater policy flexibility. Only when Europe demonstrates clearer signs of a durable recovery in manufacturing, investment, and consumer confidence will the euro be able to build a more sustainable uptrend.
The post EUR Short-Term Rebound Supported by Fed Easing Expectations, But Medium-Term Advantage Still Favors the USD appeared first on European Business & Finance Magazine.
