The Euro (EUR) trades defensively after modest weekly gains versus the US Dollar (USD), with short-term rates and ECB messaging offering fundamental support. EUR momentum remains bullish as it nears 1.18, setting the stage for further potential upside ahead of next Thursday’s ECB meeting, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

Euro supported by ECB-Fed policy divergence

"The EUR is trading somewhat defensively into Friday’s NA session, fading a slight portion of its 0.7% weekly gain vs. the USD. Overnight data have been limited to the final releases of CPI data from France and Germany, both unchanged from their preliminary prints. We remain bullish into next Thursday’s ECB meeting, where President Lagarde is expected to pair a widely anticipated hold (2.00% deposit rate) with an upgraded forecast and a relatively more hawkish tone."

"The outlook for relative central bank policy remains supportive as we consider the ECB’s constructive messaging and contrast it with a decidedly dovish Fed. Interest rate differentials are climbing from deeply negative levels and are offering the EUR fundamental support. We see scope for additional EUR gains as short-term rates markets have only just unwound their dovish bias, now leaning toward modest tightening with 4bpts priced by October 2026."

"This week’s gains have been important as they have delivered a push to fresh two-month highs and received confirmation from momentum indicators. The RSI is bullish, and at levels just shy of the overbought threshold at 70. We note the absence of any material resistance ahead of 1.18, a level that halted the EUR’s rally in both June and September. We look to a near-term range bound between 1.1680 and 1.1780."