Outlook
The euro is modestly firmer near 1.1676 against the USD, benefiting from the currency’s negative correlation with the dollar and a cautious improvement in euro-area fundamentals. Structural bullish factors include Bulgaria’s entry into the eurozone and progress on the ECB’s digital euro project, alongside a softer inflation path and a stable growth outlook for 2026. Markets will be watching Germany’s ZEW sentiment release today for cues on eurozone momentum. If German morale improves and tariff tensions show signs of easing, the euro could push toward 1.18-1.19 against the USD. Conversely, renewed US-EU tariff escalation or a risk-off shift could pull the pair back toward 1.15.
Key drivers
- Tariff headlines between the US and Europe remain a key risk, with the threat of higher tariffs on European goods weighing on risk appetite but not yet derailing the euro’s current demand. The euro’s performance has historically benefited when the USD weakens, helping EUR liquidity even amidst political risks.
- Germany’s ZEW economic sentiment index due today; better-than-expected readings could lift the euro on prospects for euro-area growth, especially given Germany’s weight in the region.
- Bulgaria adopting the euro on January 1, 2026, and the ECB advancing the digital euro project; both developments support a longer-run euro-positive backdrop.
- Eurozone inflation expected to ease toward 1.7% in 2026, with a neutral ECB policy stance anticipated in 2026 (rates likely to stay in the 1.75%-2.25% corridor), supporting a stable currency environment.
- Eurozone growth projected around 1.6% in 2026, underpinned by resilient labor markets and fiscal measures, helping to anchor EUR demand.
- Oil at 65.27 USD per barrel, up about 3.6% on the three-month view; higher energy prices can feed inflation pressures and influence the ECB’s policy path, potentially impacting the euro.
- Core price and growth drivers in major euro-area economies (Germany, France, Italy) remain a focus; Brexit, energy dynamics, and geopolitical tensions also influence risk sentiment and EUR flows.
Range
EURUSD is at 1.1676, within a 3-month range of 1.1480 to 1.1790.
EURGBP is at 0.8701, within a 3-month range of 0.8658 to 0.8833.
EURJPY is at 185.0, within a 3-month range of 176.4 to 185.4.
Oil is at 65.27 USD, with a 3-month average of 63.02 and a 3-month trading range of 59.04 to 66.18.
What could change it
- A clear resolution or escalation of US-EU tariff talks: a deal would tend to lift the euro, while renewed tariff threats could weigh on euro sentiment.
- A stronger-than-expected German ZEW reading or other euro-area data signaling stronger growth or higher inflation than anticipated, prompting more hawkish ECB expectations.
- Progress on the ECB’s digital euro or legislative milestones enabling earlier issuance; such milestones can support euro gains.
- Significant shifts in energy prices or supply concerns that feed through to euro-area inflation dynamics and ECB policy expectations.
- A marked change in US monetary policy or dollar strength on global risk trends, which would influence EURUSD and broadly affect the euro.
