EUR/USD Outlook: Is the Recent Rally Built on Expectations or Fundamentals?

In recent trading sessions, EUR/USD has posted fairly positive performance, with the pair currently trading around the 1.187–1.190 range, approaching its highest level in more than five months and rising by nearly 2.4% over the past week from earlier lows. Over a longer horizon, EUR/USD has also gained approximately 13.37% over the past 12 months, reflecting the euro’s relative strength amid periods of sustained U.S. dollar weakness.

The recent appreciation of the pair has largely been driven by downside pressure on the U.S. dollar, stemming from a reassessment of monetary policy expectations for the U.S. Federal Reserve (Fed). At times, U.S. economic data have pointed to a moderation in activity, prompting markets to price in the possibility of a more cautious policy stance from the Fed. This has reduced the appeal of the dollar as a safe-haven asset. According to several UBS currency strategy reports, the euro could continue to strengthen and potentially approach around 1.20 USD/EUR by the end of 2026, under a scenario of prolonged U.S. dollar weakness.

Meanwhile, on the Eurozone side, the economic backdrop appears stable but not particularly strong. Recent economic sentiment surveys, such as the ZEW Economic Sentiment Index, showed expectations exceeding forecasts, with a reading of around 40.8 compared with the expected 35.2, indicating an improvement in market sentiment toward the European economic outlook. Nevertheless, manufacturing activity across the region continues to face challenges in certain sectors, with the manufacturing PMI at times slipping below the expansion threshold, highlighting an uneven recovery.

Differences in monetary policy expectations between the Eurozone and the United States remain one of the key factors shaping movements in EUR/USD. While the ECB continues to pursue a cautious policy approach and maintain interest rates consistent with its inflation control objectives, markets increasingly expect the Fed to be less aggressive in keeping rates elevated if U.S. economic data continue to show limited signs of overheating. This divergence has helped create a more supportive environment for EUR/USD to hold near current levels in the short term, though it may not be sufficient to ensure a sustained upward trend should data unexpectedly turn stronger.

Market sentiment in recent weeks has also tilted more favorably toward risk assets compared with earlier periods, reducing demand for the U.S. dollar in its traditional safe-haven role. This shift has supported EUR/USD remaining at relatively elevated levels. However, it is important to note that if U.S. economic data surprise to the upside, such as stronger services PMI readings or labor market figures, the dollar could rebound, triggering a corrective move in EUR/USD from current levels.

From a personal perspective, I believe the current rise in EUR/USD is driven more by expectations than by underlying fundamentals. Much of the momentum stems from U.S. dollar weakness as markets recalibrate Fed policy expectations, while core Eurozone economic indicators have so far pointed to stability rather than the emergence of an independent and robust growth cycle for the euro area.

As a result, while the current upward trend in EUR/USD may continue, it is likely to become increasingly sensitive to incoming U.S. macroeconomic data. If expectations of policy easing are not reinforced by hard data, EUR/USD could face rebalancing-driven corrections rather than sustain a strong, one-directional uptrend.

Therefore, in the weeks ahead, investors should pay close attention to key economic data from both the United States and the Eurozone, as indicators such as CPI, PMI, and monetary policy decisions will play a crucial role in determining whether the current advance in EUR/USD can be maintained or whether it represents merely a cyclical adjustment driven by U.S. dollar dynamics.

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