Foreign Demand for Eurozone Assets
EUR/USD is forecasted to rise to 1.20 by the end of 2025 and 1.22–1.25 by late 2026. However, risks include persistent US inflation, a resilient job market, geopolitical tensions, potential US tariffs on the EU, and European political challenges such as French fiscal risks and market pressures, all of which could influence these projections. The pair is currently a little over three figures from this target.
Given the high probability of a Federal Reserve rate cut in September, we see a clear path for EUR/USD to climb higher. The recent July 2025 jobs report, which showed a gain of only 95,000 jobs against expectations of 180,000, confirms the weakening US labor market. Fed Funds futures are now pricing in an 85% chance of a 25 basis point cut next month, creating a strong headwind for the dollar.
Derivative traders should consider positioning for this upward move, targeting the 1.20 level by year-end. Buying EUR/USD call options with December 2025 expiries offers a way to profit from the expected rally while limiting downside risk. We could also look at bull call spreads to reduce the initial cost, especially as implied volatility may rise ahead of the Fed meetings.
Strength of the Euro Side
The euro side of the equation also looks supportive, which strengthens the case for the pair’s ascent. Germany’s ZEW Economic Sentiment index just hit an 18-month high in August 2025, suggesting that potential fiscal stimulus is already boosting confidence. This contrasts sharply with the deteriorating sentiment we are seeing in the US.
As the Fed begins to cut rates, hedging costs for holding non-dollar assets will fall, which should encourage large funds to sell their US dollar holdings. We are already seeing strong foreign demand for eurozone assets, a trend that is likely to accelerate. This mechanical selling pressure on the dollar can create a self-fulfilling rally in the euro.
We must be mindful that the 1.20 area represents a significant technical barrier, acting as major resistance with a double-top formation back in early 2021. A move toward this level will likely face selling pressure, so traders should plan to take profits or adjust positions as we approach it. This historical precedent suggests the climb might not be a straight line.
The primary risk to this view is sticky US inflation, which could force the Fed to delay or reduce its planned cuts. The latest July 2025 CPI reading of 2.8% has cooled but remains above the Fed’s target. To manage this risk, traders could purchase cheap, out-of-the-money puts to hedge long positions against a sharp reversal if the US jobs market suddenly proves resilient.
