EUR/USD is hovering around 1.1620, rebounding slightly from recent lows as expectations for a Eurozone recovery improve, while the U.S. dollar has paused after a strong rally.
However, the euro’s recovery remains limited due to the wide U.S.–EU interest rate gap and the likelihood that the Federal Reserve will maintain a cautious policy stance, while the ECB leans toward keeping rates steady.
According to Reuters, the yield on the U.S. 10-year Treasury note currently stands near 4.35%, while the equivalent German Bund yield is around 2.55%.
This gap of more than 180 basis points continues to weigh on the euro, underscoring that monetary policy differentials remain the key driver of the pair’s direction.
In Europe, economic activity is showing encouraging signs after a prolonged period of stagnation.
The S&P Global Composite PMI for October came in at 52.2, up from 51.2 in the previous month — the highest level in 17 months. Growth was led primarily by Germany, while France remains a weak spot amid political uncertainty and risks of breaching EU fiscal rules.
Inflation in the Eurozone stood at 2.2% in September (flash estimate by Eurostat) — still above the ECB’s 2% target. The ECB is expected to keep rates unchanged at least until 2027, implying a neutral stance. The central bank eased earlier than the Fed and is now in a pause phase, rather than moving into an aggressive easing cycle involving rapid rate cuts or renewed quantitative easing.
In contrast, the U.S. economy continues to show resilience despite high borrowing costs. The Conference Board’s October outlook projects GDP growth of 1.8% in 2025, up from a previous estimate of 1.3%. Yet consumer sentiment remains cautious — a mid-October survey by The Guardian found that 75% of Americans believe living costs are still rising, highlighting persistent inflation pressures.
On monetary policy, Fed Chair Jerome Powell, in his October 14 speech, reiterated that inflation remains above the 2% target, and the Fed will “maintain a cautious stance for the rest of 2025.” This reinforces expectations that U.S. interest rates will stay higher than those in the Eurozone for an extended period, giving the U.S. dollar a sustained advantage.
Politically, France remains a focal point of risk in Europe due to its unresolved fiscal challenges, while the United States faces the possibility of a government shutdown amid a congressional budget deadlock. Historically, periods of fiscal stress or geopolitical tension have tended to boost safe-haven demand for the dollar, prompting global capital to flow back into U.S. assets.
Overall, the U.S. dollar retains a medium-term advantage thanks to its tighter monetary policy and stronger economic fundamentals. In the near term, EUR/USD may continue its technical rebound, but a lasting euro recovery will depend on whether the ECB can generate a meaningful growth differential versus the U.S. — a prospect that remains uncertain for now.
