EUR/USD trades near multi-week highs amid softer US Dollar, cautious Fed outlook

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The Euro (EUR) strengthens against the US Dollar (USD) on Monday as the Greenback remains under sustained pressure following last week’s 25 basis point (bps) interest rate cut by the Federal Reserve (Fed). At the time of writing, EUR/USD is trading around 1.1760, its highest level since October 1.

EUR/USD edges higher as the US Dollar remains under pressure following the Fed’s interest rate cut.
Dovish Fed commentary and weaker US manufacturing data weigh on the Greenback.
Markets turn to the delayed NFP and CPI data for clues on the Fed’s policy outlook.

Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is hovering near 98.18, close to a two-month low.

Adding to the US Dollar’s downside, dovish remarks from Fed Governor Stephen Miran kept the Greenback under pressure, as he defended his preference for a larger 50 basis point rate cut at the last meeting. Miran argued that underlying inflation pressures are already close to the Fed’s 2% target once lagging and imputed components are stripped out, warning that policy risks remain “unnecessarily tight.”

He stressed that elevated shelter inflation reflects past supply-demand imbalances rather than current conditions and said a quicker pace of easing would be appropriate to move policy closer to neutral.

On the data front, the US New York Empire State Manufacturing Index for December pointed to a sharp slowdown in activity. The index fell to -3.9 from 18.7 in November, missing market expectations of 10.6.

Attention now turns to a data-heavy US economic calendar in the days ahead, with upcoming releases expected to play a key role in shaping expectations around the Fed’s policy path into 2026. The spotlight this week falls on the delayed October and November Nonfarm Payrolls (NFP) report, due to be released on Tuesday, followed by the US Consumer Price Index (CPI) on Thursday.

On the Euro side, the economic calendar is relatively light at the start of the week. Eurozone Industrial Production rose by 0.8% MoM in October, beating market expectations of 0.1% and accelerating from 0.2% previously.

Looking ahead, focus shifts to the preliminary HCOB Purchasing Managers Index (PMI) surveys, the ZEW Economic Sentiment survey on Tuesday, and the European Central Bank’s (ECB) interest rate decision on Thursday, where policymakers are widely expected to keep all three key interest rates unchanged.

With the ECB expected to remain on hold while markets continue to reassess the Fed’s monetary policy outlook and expectations for further easing, the path of least resistance for EUR/USD appears to remain to the upside.

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.