EUR/USD. Analysis and Forecast

[Ben Graham]

The single European currency is holding near the 1.1760 level, trading within a narrow range. Such calm price action is quite logical given the holiday period between Christmas and New Year.

The EUR/USD pair may have some potential to strengthen, as the US dollar is facing pressure amid ongoing expectations of two additional possible Federal Reserve rate cuts in 2026. According to the CME FedWatch Index, the probability of rates remaining unchanged at the January meeting stands at 83.9%, slightly higher than 80.1% a week earlier. At the same time, the probability of a 25-basis-point rate cut has declined from 19.9% to 16.1%.

The year now coming to an end has been marked by significant losses in the US dollar's positions.

At its December meeting, the US central bank cut interest rates by 25 basis points, setting the target range at 3.50%–3.75%. Over the course of 2025, the Fed reduced rates by a total of 75 basis points, reflecting a slowdown in the labor market and still-elevated inflation.

The Fed's rate cuts and a strong year for global equity markets played a key role in weakening the dollar, paving the way for the euro to take the lead. However, many analysts believe that the European economy does not justify such expectations and does not deserve this advantage.

The euro may face challenges as market risk appetite increases, amid heightened tensions in relations between Ukraine and Russia. Russia's foreign minister noted that Moscow's position during negotiations could change.

However, the downside in the euro is limited, as markets are factoring in the divergence in policy direction between the European Central Bank and the US Federal Reserve. In December, the ECB left interest rates unchanged and signaled that they are likely to remain at current levels in the near term. ECB President Christine Lagarde emphasized that high uncertainty complicates the formulation of forecasts regarding future interest rate changes.

As no major events are expected before the end of the year, attention is shifting to 2026 and the key factors that are expected to determine movements in currency pairs.

At the center of attention is central bank policy, which will undoubtedly be the main driver of exchange rates. Analysts' views on the Fed's intentions remain mixed, creating a degree of uncertainty that is prompting investors to avoid taking large positions.

For trading opportunities today, attention should be paid to the release of the minutes from the latest Fed meeting, as much will depend on whether they can influence future Fed decisions.

From a technical perspective, oscillators on the daily chart are positive, confirming a bullish outlook. Support is located at the 9-day EMA near 1.1760, while resistance is at the round level of 1.1800. However, during the holiday period, prices are likely to remain within the same sideways trading range.

The material has been provided by InstaForex Company - www.instaforex.com