The Euro’s Performance
The Euro has gained from Germany’s fiscal loosening and diversification flows. Germany’s debt brake was loosened at the start of the year, leading the Euro to be the second best-performing G10 currency in Q2, just behind the Swiss Franc.
While expectations are that German fiscal spending could help Europe’s largest economy recover from stagnation next year, the Euro has been preparing for this shift for several months. Concurrently, diversification trades are expected to offer continued support to the Euro in the near term.
The US Federal Reserve recently upgraded its growth projections for 2025 and 2026, due to resilient consumer spending and increased business investment. This may lead to continued investment inflows into the US.
There was a significant reduction in long US dollar positions in the first half of the year. However, due to less economic disruption from trade policies than anticipated, there is caution against expecting further declines in the US dollar. Instead, the Euro and US dollar are likely to experience choppy range trading in 2026.
Germany’s Economic Stimulus
The Euro has found support this year from Germany’s fiscal loosening and a move away from the dollar. However, we see the U.S. economy holding up better than expected, which is likely to keep the EUR/USD in a range rather than fueling a major rally into 2026. This view is based on the Federal Reserve’s upgraded growth forecasts from just last week.
We have seen early signs that Germany’s stimulus, approved at the start of 2025, is taking hold. The most recent German Ifo Business Climate index for November rose to 91.5, its third consecutive monthly increase, suggesting economic stagnation may be ending. This has helped the Euro become one of the stronger G10 currencies since the spring.
On the other hand, the American economy continues to show surprising strength, justifying the Fed’s optimism. November’s retail sales data showed a 0.5% month-over-month increase, beating forecasts and highlighting the resilience of the U.S. consumer. This robust economic activity provides a solid floor for the dollar.
For derivative traders in the coming weeks, this environment suggests that strategies profiting from sideways movement are favorable. We think selling volatility through option structures like iron condors or short straddles makes sense. These positions are designed to profit as long as the EUR/USD pair remains within a defined price channel.
This outlook is reflected in the options market, where one-month implied volatility for EUR/USD has compressed to around 6.5%. This is significantly lower than the levels seen during the broad dollar sell-off in the first half of 2025. It shows that the market is not currently pricing in a significant directional move.
We can look back to the 2015-2017 period, when EUR/USD was largely trapped between 1.05 and 1.15, as a potential historical parallel. That environment frustrated trend-followers but was profitable for those positioned for range-bound action. A similar dynamic seems to be developing as we head into the new year.
