EUR/USD: A clear acceleration of Germany's ZEW index

While risk appetite remained largely intact in the final stretch of the year, the euro continued its winter climb against the dollar. Currency traders acknowledged the increasing likelihood of only one federal interest rate cut in 2026, but welcomed the resumption of asset purchases, one of the Fed's key announcements last week following the final FOMC meeting of 2025.

"It didn't take a genius to know that the US Federal Reserve (Fed) was going to cut its key interest rate by 25 basis points in December. However, there is considerable uncertainty for 2026," observes Christopher Dembik, investment strategist at Pictet AM.

"The FOMC is divided on the true state of the US economy. The good news, however, is that no one expects a resurgence of inflation. Opinions differ between those who believe the US economy will accelerate next year without additional stimulus measures and those who are worried about a slowdown in the labor market. Furthermore, what stance will Powell's successor take in the spring? Will he assert his independence or pledge allegiance to the White House and opt for massive interest rate cuts?" the asset management executive continued.

Independent in principle from the executive branch, he will be nominated by Donald Trump and must be confirmed by the Senate.

On 18 December, the European Central Bank will convene its Governing Council for the last time this year. Nomura economists anticipate that the central bank will "maintain its deposit rate unchanged at 2%. The monetary institution is expected to continue to emphasize strict data reliance and a meeting-by-meeting decision-making approach, without adjusting its forward guidance. Christine Lagarde is expected to reaffirm that the current level of rates - considered neutral - positions the central bank adequately to navigate a still uncertain environment, particularly given developments in US monetary policy."

"The ECB will also publish a new set of macroeconomic projections, extended for the first time to 2028. We expect it to project HICP inflation of 2% in 2028, which would support the decision to keep interest rates unchanged, despite expected inflation being significantly below target in 2026 and 2027. However, we identify a significant risk that the ECB will use HICP inflation of 2% in 2028, which would reinforce a cautious bias in its communication."

HICP stands for Harmonised Index of Consumer Prices, and allows for comparisons within the Eurozone.

"The ECB and now the Fed believe they have reached the neutral zone for monetary policy and are raising their growth forecasts. A further decline in interest rates is therefore not guaranteed for 2026, which could reduce investors' risk appetite. However, with inflation currently under control, central banks will still be able to adjust their rates downward if there are doubts about growth: barring an inflationary surprise, the central banks' 'put' option would therefore remain in place," says Francois Chauchat, economist at Dorval AM.

Currency traders have just learned of the ZEW index of confidence in the German economy, the largest in the Eurozone. The index rose sharply to 45.9 points, partially offsetting the disappointments caused by the PMI barometers published earlier this morning.

"The outlook is more optimistic. After three years of economic stagnation, the chances of recovery are good, and this is reflected in the confidence of economic actors. Expansionary fiscal policy will give new impetus to the German economy. However, the recovery remains fragile. Measures to manage persistent trade conflicts, geopolitical tensions, and a lack of investment will likely also be on the reform agenda for 2026," commented Achim Wambach, President of the ZEW Institute.

Right now, the EUR/USD is trading at $1.1716.

KEY TECHNICAL ELEMENTS
The descending trendline that had been holding the spot price since the formation of the notable candle on 17 September was broken during a bout of volatility, which was confirmed by a pullback.

MEDIUM-TERM FORECAST
Based on the key technical factors mentioned above, our medium-term outlook for the EUR/USD is neutral.