The euro traded steadily around the $1.18 level in 2025, recording modest gains against the U.S. dollar as investors positioned for increasingly divergent monetary policy trajectories between the European Central Bank (ECB) and the U.S. Federal Reserve.
Market participants have continued to accumulate the single currency amid expectations that interest rate differentials between Europe and the United States could persist into early 2026, offering sustained support for the euro in the near term.
The euro’s resilience has also extended against the British pound, following confirmation from the ECB that it intends to maintain its current policy stance. The central bank held its deposit facility rate at 2.00%, after implementing a series of rate cuts from 4.00% to 2.00% between June 2024 and June 2025.
Updated economic projections and recent macroeconomic data have reinforced the ECB’s confidence that inflation is converging toward its medium-term target, allowing policymakers to adopt a prolonged pause in monetary easing. Analysts say this steady policy approach provides a favourable backdrop for the euro, particularly against currencies whose central banks are expected to deliver additional rate cuts.
ECB President Christine Lagarde acknowledged the elevated uncertainty surrounding the global economic outlook, noting that such conditions make precise forward guidance challenging. However, she indicated that the central bank remains prepared to act should inflationary or financial stability risks re-emerge.
Across the Atlantic, the U.S. monetary outlook has become increasingly fluid. Markets are factoring in the possibility that President Donald Trump will nominate a new Federal Reserve Chair to replace Jerome Powell when his term expires in May, raising speculation about a more accommodative policy stance in the years ahead.
The Federal Reserve has already delivered three interest rate cuts in 2025, reducing the benchmark rate by a cumulative 75 basis points. At its December meeting, the central bank lowered rates by 25 basis points to a target range of 3.50%–3.75%, citing signs of labour market cooling and inflation easing, albeit remaining above target.
ECB Governing Council member Yannis Stournaras reinforced the central bank’s current position, stating that prevailing interest rates remain appropriate barring a major external shock. Speaking over the weekend, the Bank of Greece governor expressed optimism about the eurozone’s economic trajectory as it heads into 2026.
Stournaras said inflation is expected to continue converging toward price stability, while economic growth remains resilient despite persistent geopolitical and financial uncertainties. He described the outlook as one of “cautious optimism,” with the eurozone economy positioned for a smooth landing.
Recent market movements have also reflected a reassessment of ECB policy expectations. Eurozone bond yields have edged higher as investors priced out further near-term rate cuts, lending additional support to the euro.
Analysts at MUFG Bank noted that with both the Bank of England and the U.S. Federal Reserve still expected to lower rates further in 2026, the euro could continue to outperform. The bank forecast sustained euro strength next year, assuming the ECB maintains its current policy stance while other major central banks pursue further easing.
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