Fed's expectations, the stability of the ECB and policy global changes
published at 12.08.2025
The eurusd pair is trading with modest gains around 1.1645 as the new week begins, supported by shifting interest-rate expectations and mixed economic signals from both sides of the Atlantic. With the Federal Reserve set to announce its December policy decision and key Eurozone data releases ahead, traders are preparing for a period of elevated volatility. The balance between U.S. economic uncertainty and stabilizing conditions in Europe continues to define the pair's direction in the near term.
Markets currently assign nearly an 87% probability of a 25 bps rate cut this Wednesday, which would bring the federal funds rate down to 3.50%–3.75%. Investors will closely watch the accompanying press conference and updated “dot-plot” projections.
A so-called “hawkish cut,” where the Fed lowers rates but signals caution about future easing, could offer temporary support for the U.S. dollar and limit eurusd gains. Analysts also expect internal disagreements within the FOMC, with BNY strategist Bob Savage noting potential dissents from both hawkish and dovish members.In Europe, inflation came in slightly higher than expected in November, reducing the immediate need for the European Central Bank to act. Economists widely expect the ECB to keep rates unchanged at the December 18 meeting. Expectations that the ECB may be finished with its rate-cut cycle help support the euro against the dollar. Goldman Sachs forecasts that the deposit rate will remain at 2.0% through 2026 unless inflation falls meaningfully, while Deutsche Bank sees room for a 25 bps hike by late 2026 due to persistent price pressures.
The latest eurusd rally has been driven by stronger European inflation, improving business activity, and confidence that ECB easing is nearing its end. Hopes for progress in Ukraine and expectations of a Fed rate cut have also supported the euro. However, political challenges in Germany and the risk of a Fed pause in January have slowed recent momentum. Reuters analysts see limited upside, forecasting eurusd at 1.17 in one month, 1.19 in three months, and 1.20 in a year. Notably, expectations for short-term dollar strength have increased, with 30% of respondents now seeing room for a U.S. rebound, up from 6% last month.
Beyond eurusd, analysts highlight broader currency trends. The Japanese yen is expected to strengthen significantly due to policy divergence, with markets pricing a 90% probability of a rate hike to 0.75% on December 19. Bloomberg reports that BoJ Governor Kazuo Ueda may confirm further policy normalization if economic conditions align. Meanwhile, the Swiss franc is viewed as the weakest among major currencies.
Recent U.S. data adds complexity to the Fed’s decision. ADP reported a loss of 32,000 jobs in November, with the three-month average turning negative for the first time since 2020. Initial Jobless Claims, however, fell sharply to a three-year low of 191,000—likely influenced by Thanksgiving seasonality. Inflation remains stable, with core PCE rising 0.2% in September and annual inflation easing to 2.8%. Meanwhile, political uncertainty is weighing on sentiment, as reports suggest Kevin Hassett may replace Jerome Powell as Fed Chair, raising concerns about aggressive easing and potential inflation risks.
Eurusd is currently trading near 1.1640 after giving up part of Friday’s gains, but the broader environment still leans in favor of the euro. A confirmed Fed rate cut, stable European inflation, and expectations of an ECB hold all support the potential for a move toward 1.22 in the coming weeks. For investors, the most practical approach is to consider buying on dips above the 1.1580–1.1600 area, targeting gradual upside while remaining aware that a hawkish Fed message could trigger short-term volatility. As long as the macro backdrop favors policy divergence, the euro retains an advantage over the U.S. dollar.
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