Outlook
The euro remains under pressure from strong USD demand, keeping EUR/USD near softer levels even as euro-area data beat forecasts on occasion. The latest quarterly GDP reading showed the bloc grew 0.3% in Q4 2025, a modest positive backdrop that sits against ongoing USD strength and external headwinds. In the near term, a soft-to-flat domestic growth impulse and a cautious ECB stance mean the euro may struggle to gain clear traction unless German data surprise positively. Longer term, Bulgaria’s full adoption of the euro (effective January 2026) and progress on the digital euro project provide a modest, supportive backdrop for euro-area integration and efficiency, though policy remains data-dependent and not inclined to surprises.
Key drivers
- USD demand continues to dominate EUR movements, with the euro’s decline linked to the dollar’s strength.
- Q4 2025 euro-area growth at 0.3% supports the narrative of a resilient economy, but concerns persist about export competitiveness if the euro strengthens too much.
- Germany’s December retail sales data due this week are expected to show a rebound, which could offer a short-term lift to the euro if confirmed.
- Bulgaria joined the euro area on 1 January 2026, reinforcing euro-area integration and potentially supporting EUR sentiment over the longer run.
- The ECB remains cautious and data-dependent, with no imminent rate changes expected despite inflation softness.
- Progress on the digital euro adds a longer-term structural tailwind for the currency, with pilot planning around mid-2027 and possible issuance by 2029.
- The geopolitical and energy backdrop remains relevant: the Ukraine situation and energy prices keep euro-area inflation risks to the fore, while oil price volatility adds to overall market risk sentiment.
Range
EUR/USD is at 1.1860, about 1.5% above its three-month average of 1.168, and has traded in a roughly 4.8% range from 1.1480 to 1.2031 over the past quarter. EUR/GBP sits at 0.8662, about 0.9% below its three-month average of 0.8737, with a tight 2.1% range from 0.8654 to 0.8833. EUR/JPY is at 183.8, about 0.9% above its three-month average of 182.2, moving within a 5.5% range from 176.4 to 186.1. Oil (Brent Crude OIL/USD) trades at 67.36, around 6.5% above its three-month average of 63.24, with a wide 17.0% range from 59.04 to 69.09, reflecting elevated energy risk that can feed into euro-area inflation expectations.
What could change it
- A stronger-than-expected German December retail sales report could lift the euro by signaling domestic demand resilience.
- Any hawkish tilt from the ECB or clearer signaling of policy tightening on data surprises could support a firmer EUR.
- A sustained pullback in oil prices or a more favorable energy outlook could ease euro-area inflation pressures and support the euro.
- A softer-than-expected US data flow or a broad-based improvement in risk sentiment reducing USD strength could help EUR dollar pairs with a rebound.
- Developments around the digital euro and Bulgarias euro adoption could gradually provide structural support to the euro, if progress remains steady and integration smooth.
