Euro-to-Dollar Week Ahead Forecast: Staying Constructive

Image © European Union - European Parliament.

The euro looks set for further gains against the dollar.

The euro to dollar exchange rate (EUR/USD) technical setup has improved markedly, and this week's Federal Reserve interest rate cut will underscore the fundamental case for ongoing resilience.

The pair rallied to a high of 1.1681 last week, a level last seen in mid-October, and in doing so broke above the 21- and 55-day exponential moving averages (EMA).

The move above these two momentum indicators provides a clean technical signal that the outlook has flipped from the downside to upside in the short-term.

In sympathy with this, we would anticipate further gains in the coming week.

That being said, a pullback ahead of Wednesday's Federal Reserve decision cannot be ruled out, as this could be a high-stakes event for currency markets.

Weakness should be limited to the 1.1610 area where the 21- and 55-day EMAs are converging, confirming this to be the line-in-the-sand for the coming week.

Of course, should the Fed strike a hawkish tone, euro-dollar can come under significant pressure and a break back into the 1.15s will transpire, putting the exchange rate back under pressure into year-end.

However, our base case is that the Fed won't have the data to 'shake the boat' to the degree required to trip up the euro's rally.

This is why we would anticipate setbacks to the euro's advance to be shallow, and ultimately why 1.17 is in scope in the coming days.

There is some EUR-based interest due Wednesday when European Central Bank (ECB) Governor Christine Lagarde addresses the FT Global Boardroom event in London, where she is expected to touch on Eurozone monetary policy.

Expect her to maintain the view that interest rates are in a good place, which will broadly underpin the view the ECB won't be cutting anytime soon, which confers support to the euro.

Recent industrial production improvements and firming inflation data should underpin the case for Lagarde to maintain a steady stance.

Above: File image of Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.

The divergent path between U.S. and European interest rates will become all the more stark this week when the ECB's steady hand comes up against that of an active Federal Reserve.

The week's highlight for EUR/USD is the Federal Reserve policy decision, due Wednesday, and markets have almost fully priced in a 25 basis point interest rate cut, which would take the Fed funds target range to 3.50–3.75%.

The decision to cut will rest on a series of economic surveys that confirm the labour market is softening.

Last week saw EUR/USD jump to 1.1681 after the U.S. November ADP employment report read -32k, disappointing consensus expectations for a 10k gain in employment, in the process sealing this Wednesday's rate cut.

The rate cut itself won't be remarkable enough to drive any sizeable FX market reaction.

Instead, it's the outlook for interest rates in 2026 that will be of greater interest. Here, there's uncertainty owing to divisions within the Fed's FOMC.

"Some members remain concerned about inflation staying above target, while others place greater emphasis on signs of labour market weakness," says Hann-Ju Ho, Senior Economist at Lloyds Market Insights.

The Fed’s statement and Chair Powell’s press conference, along with updated economic projections, will also provide insight into policy intentions for 2026. This meeting includes updated forecasts, including interest rate projections (the dot plot).

Above: What markets expect from the Fed. Image courtesy of Lloyds Bank.

"The September projections showed a consensus of 3.625% for end-2025, consistent with a 25bp cut on Wednesday, but only 25bp of additional easing in 2026, less than markets currently expect. It will be interesting to see whether the dot plot projection shifts, given the current divisions within the Committee," says Hann-Ju Ho.