– Written by
Frank Davies
STORY LINK Euro to Dollar Forecast: EUR/USD Near 1.18 as Fed Outlook Dominates
The Euro to US Dollar exchange rate (EUR/USD) held near 1.1772 into the post-Christmas weekend, as the dollar remains under pressure despite solid US growth data.
Markets continue to focus on Fed policy expectations and concerns around central-bank independence rather than near-term activity indicators.
With long euro positioning elevated, the scope for further gains may depend on whether fresh catalysts emerge in early January.
EUR/USD Forecasts: 3-Month Highs into 2026?
The Euro held firm in global markets on Wednesday while the dollar remained on the defensive despite better than expected US GDP data.
The Euro to Dollar (EUR/USD) exchange rate hit 3-month highs just below 1.1810 before settling just below 1.18.
Any developments surrounding the next Federal Reserve Chair and wider central bank personnel will continue to be watched very closely.
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MUFG expects further limited net dollar losses next year driven by changes in interest rates; “We expect the ECB to remain on hold throughout 2026 which provides compelling reason for a higher EUR/USD on relative front-end yield moves given the Fed is set to cut by at least three times, and more than priced.”
After initial stability, it has an end-2026 EUR/USD forecast of 1.24.
The dollar tends to remain vulnerable in global markets into the new-year period, but the latest COT data, released by the CFTC, recorded an increase in long, non-commercial Euro positions to near 145,000 contracts from 138,000 previously and the highest reading for two years.
This positioning will increase the risk of a Euro correction early next year. There is also likely to be very strong EUR/USD resistance on any move to the 1.20 area.
There has been further strong demand for precious metals with silver and gold positing fresh record highs. This suggests that the dollar is not being seen as an attractive defensive asset at this stage.
AJ Bell investment director Russ Mould commented; “Weakness in the dollar, expectations for further US rate cuts, concerns about government deficits and debt in the developed world and geopolitical tensions have all been combining to put precious metals on a pedestal.”
US third-quarter GDP data recorded annual growth of 4.3% from 3.8% previously and above consensus forecasts of 3.3%.
Markets are now trading in less than a 15% chance of a further Fed rate cut in January while still backing two cuts next year.
CIBC commented; “Besides being a bit dated, the Fed prioritizes the job market over activity data as a leading indicator of where the economy is headed, and the labor market has moved further in the wrong direction in fourth quarter, albeit with more limited data.”
HSBC remains wary over the short-term dollar outlook; “The USD risk premium widened in December which suggests USD weakness may reflect growing concerns around Fed independence, not just the monetary policy outlook.”
It added; “With many other G10 central banks on hold, we think Fed liquidity operations and a slight dovish Fed bias leaves the USD outlook tilted to the downside.”
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TAGS: Euro Dollar Forecasts
