The euro extended its advance against the United States dollar at the start of the week, trading around the $1.1764 level on Monday as monetary policy signals from the European Central Bank and the U.S. Federal Reserve continued to move in opposite directions.
The single currency edged closer to its highest level since late September, underpinned by growing confidence that the ECB will maintain a steady policy stance for an extended period, while the Fed edges closer to a more accommodative path.
At its most recent meeting, the ECB kept benchmark interest rates unchanged for the fourth consecutive time, reinforcing its view that current levels remain appropriate given prevailing economic conditions. Policymakers indicated that rates are likely to stay elevated for some time, pointing to the eurozone’s resilience in the face of U.S. trade tariffs and other global headwinds.
Recent macroeconomic indicators across the currency bloc have exceeded expectations, prompting the central bank to revise its growth outlook upward for a second time following a similar adjustment in September. The ECB’s latest assessment reaffirmed confidence that inflation will converge sustainably toward its medium-term target.
Updated Eurosystem staff projections show headline inflation averaging 2.1% in 2025, easing to 1.9% in 2026 and 1.8% in 2027, before returning to 2.0% in 2028. Meanwhile, eurozone economic growth is now projected at 1.4% in 2025, an improvement from the earlier forecast of 1.2%, with inflation expected to remain broadly anchored around the 2% mark through the end of the forecast horizon.
In contrast, the outlook for U.S. monetary policy has softened following weaker-than-expected inflation readings, which have increased market expectations that the Federal Reserve could begin reducing borrowing costs next year.
The Fed implemented a widely anticipated 25-basis-point rate cut in December, bringing the federal funds target range to 3.50%–3.75%. The move weighed on the dollar, which slipped against major counterparts including the euro, Swiss franc, and Japanese yen.
Although the Federal Open Market Committee signalled a cautious approach to additional easing, investors continue to price in at least one further 25-basis-point cut in the first quarter of 2026. The Fed’s updated dot plot highlighted a broad divergence of views among policymakers, with the median projection pointing to one rate reduction next year but no clear consensus beyond that.
Speaking after the decision, Fed Chair Jerome Powell noted that following cumulative rate cuts of 75 basis points since September 2025 and 175 basis points since September 2024, policy settings are now within a broad range of estimates considered neutral. He added that the central bank is well positioned to pause and assess how economic conditions evolve, reinforcing expectations of a data-dependent path ahead.
