EUR/USD has decreased this week due to rising US rates and FOMC risks. The near-term support level is at 1.1585/90, with the risk of dropping to 1.1555/65 in thinner year-end markets. However, a bounce back to 1.1800 by the year’s end is still possible.
In the eurozone, France has passed a social security budget, though challenges lie ahead for the 2026 state budget. Fiscal risks could still affect the euro in future years. Geopolitical factors include EU plans to use emergency powers to freeze EUR210bn of Russian assets for Ukraine, as leaders aim to prevent a forced ceasefire.
Concerns Over Euros Safe Haven Status
Concerns exist about potential impacts on the euro’s safe-haven status due to property rights issues. Nonetheless, there’s no current flow data indicating such an effect. Provided the ECB remains uninvolved with backing Ukraine’s loans, it’s unlikely this will negatively influence the euro.
With US interest rates climbing, the EUR/USD is facing downward pressure ahead of the upcoming FOMC meeting. The most recent US inflation data for November came in at a stubborn 3.4%, giving the Federal Reserve little reason to signal rate cuts, which has pushed the 2-year Treasury yield back towards 4.75%. This environment supports a stronger dollar in the immediate term.
Given this outlook, we see a probable test of the 1.1585/90 support level for EUR/USD in the coming weeks. Traders could consider buying near-term put options to hedge or speculate on this drop, especially as thinning holiday market liquidity could exaggerate moves down to the 1.1555 area. The key is to watch for signs of stabilization at these levels.
European Economic Data and Impact on Euro
On the European side, economic data is not offering much support for the euro. Last week’s German industrial production figures showed a continued slowdown, and we are also watching France, where political hurdles are making the passage of the 2026 budget a source of concern. These domestic issues are creating headwinds for the single currency.
However, we believe any significant dip in EUR/USD might be short-lived and could present a buying opportunity. A sharp bounce back toward 1.1800 is possible before the end of the year, potentially driven by profit-taking on short dollar positions. This suggests that positioning for a rebound with call options expiring in January 2026 could be a prudent strategy once the pair shows signs of bottoming.
The geopolitical discussion around using frozen Russian assets to fund Ukraine remains a background factor. While some are concerned this could damage the euro’s safe-haven status, we have seen no evidence of this in capital flow data, much like how markets absorbed initial sanctions packages back in 2022. For now, this is a low-probability risk for the currency as long as the European Central Bank is not directly involved.
