The EURUSD pair has recovered from its recent low around 1.1470 as the U.S. dollar temporarily weakened; however, the outlook for a sustainable rebound in the euro remains uncertain.
The recent weakness in the greenback mainly reflects a return of “risk-on” sentiment following encouraging signals from budget negotiations in Washington, which have eased concerns over a potential U.S. government shutdown.
As a result, capital has temporarily flowed out of safe-haven assets such as the dollar and back into risk assets like equities and commodities, allowing EURUSD to stage a notable technical rebound.
Nevertheless, the broader fundamental picture still favours the U.S. dollar, suggesting that the current recovery in EURUSD may be short-lived.
To assess the pair’s outlook, it is essential to examine conditions on both sides — the Eurozone and the United States.
The Eurozone is undergoing a period of weak and uneven recovery, as major economies such as Germany, France, and Italy remain under pressure from high energy costs and subdued global demand. According to the European Commission’s Autumn 2025 forecast, the bloc’s GDP is expected to grow by only around 1.0%, indicating that growth remains well below potential.
Meanwhile, although inflation has fallen sharply to near 2.1%, it remains driven by service and energy prices, making it difficult for the European Central Bank (ECB) to chart a clear policy path.
In reality, the ECB is facing a policy dilemma: inflation is easing, but growth remains weak. Prolonged monetary tightening risks deepening the slowdown, while further rate hikes could strain credit conditions. This delicate balance leaves the euro with limited impetus to sustain a meaningful rally.
In contrast, the U.S. economy continues to show resilient performance. According to the latest data from the Bureau of Economic Analysis (BEA), U.S. GDP grew 3.8% (SAAR) in the second quarter of 2025, while the unemployment rate averaged around 4.3%, indicating a robust labour market. The relative strength of the U.S. economy compared to other developed nations continues to bolster investor confidence in the dollar as both a safe-haven and high-yield asset.
On the monetary policy front, the Federal Reserve (Fed) remains cautious, prioritizing inflation control even as price pressures have eased significantly. According to the September 2025 Summary of Economic Projections (SEP), the median federal funds rate is projected to stand at around 3.6% by the end of 2025 and 2.6% by the end of 2026, while the core PCE inflation is forecast to remain around 2.6% in 2025 — still above the Fed’s 2% target. These figures suggest that the Fed has little reason to pursue aggressive easing in the near term, allowing the dollar to maintain its real yield advantage over other major currencies.
The yield differential between the U.S. and the Eurozone continues to favour the greenback, supporting capital inflows into dollar-denominated assets. Moreover, the global trade environment remains uncertain following new U.S. tariff measures on imported goods, particularly from China and the EU. While the U.S. benefits from its large domestic market and energy independence, Europe faces headwinds from weaker exports and elevated energy costs. These factors keep the euro under pressure in the medium term, especially as investment flows favour markets with higher yields and stronger growth prospects.
In the short term, EURUSD may maintain its technical rebound, supported by a softer dollar and improved risk sentiment. If upcoming U.S. CPI data confirm that inflation continues to cool, the pair could extend its current upward momentum modestly.
In the medium term, however, the base case remains that the U.S. dollar will retain its dominant position. As U.S. growth stays resilient and the Fed refrains from signalling any clear rate cuts, EURUSD is likely to trade within a narrow range and remain under downward pressure. Only if the ECB adopts a more hawkish stance or the U.S. economy shows significant signs of cooling could the euro gain real traction and stage a meaningful breakout.
