Outlook
The euro remains under pressure in light of a data lull and mixed policy signals, with the next trigger likely to be the ECB meeting minutes. Longer-term catalysts include Bulgaria joining the euro area and progress on the digital euro, but near-term moves will be driven by external factors such as the US dollar’s direction and energy-price swings. The euro’s performance will also hinge on inflation and growth expectations for the Eurozone, as well as geopolitical developments around energy markets and the war in Ukraine.
Key drivers
- Data absence and policy signals: A lack of fresh European data leaves the euro direction tethered to comments from officials and the ECB meeting minutes, rather than hard numbers. Lagarde’s view that US tariffs would have a minimal inflation impact reinforces a cautious stance on near-term euro strength (policy significance explained: a neutral stance means the ECB is not pushing rates higher or lower aggressively).
- ECB policy stance and euro-area milestones: The ECB is projected to stay on a neutral path in 2026 with policy rates in a 1.75%-2.25% range. Bulgaria adopting the euro on January 1, 2026, and the digital euro initiative moving toward issuance, are structurally positive for the euro but may take time to feed through to prices and policy expectations.
- Inflation and growth backdrop: Eurozone inflation is forecast to ease toward 1.7% in 2026, while growth is seen around 1.6% in 2026, underpinning a generally stable policy environment but limited upside for a strong euro unless risk appetite improves.
- USD correlation and risk sentiment: The euro often moves opposite the US dollar. A firmer USD or weaker risk appetite can keep EUR gains contained even if euro-area fundamentals improve.
- Energy and oil dynamics: Oil prices have been volatile and elevated relative to recent averages. Higher energy costs can sustain inflation pressures in the euro area and influence ECB policy expectations.
- Geopolitical and energy risk: Ongoing Ukraine-related tensions and European energy market developments continue to inject uncertainty, shaping euro demand.
Range
EUR/USD is at 1.1851, about 1.7% above its 3-month average of 1.1656, and has traded in a stable 3.4% range from 1.1480 to 1.1873. EUR/GBP stands at 0.8679, around 0.8% below its 3-month average of 0.8745, with a 2.0% range from 0.8658 to 0.8833. EUR/JPY is 183.9, about 1.2% above its 3-month average of 181.8, within a 5.5% range from 176.4 to 186.1. Oil is at 65.04 USD, roughly 3.2% above its 3-month average of 63, trading within a volatile 12.1% range from 59.04 to 66.18.
What could change it
- ECB minutes and policy signals: Any shift toward a less neutral or more hawkish/dovish stance could prompt new euro moves.
- US data and Fed messaging: Surprises in US inflation or employment data, or a shift in Fed policy expectations, could move the USD and indirectly EUR crosses.
- Euro-area developments: Further clarity on Bulgaria’s euro adoption timeline or tangible progress on the digital euro could support euro sentiment.
- Energy prices and inflation trajectory: A marked change in oil or energy prices that alters euro-zone inflation expectations could affect the ECB’s policy path and the euro.
- Geopolitics and risk appetite: Escalation or de-escalation in Ukraine-related tensions or broader market risk sentiment can drive demand for the euro as a reserve and funding currency.
