EUR/USD: A Bullish Case Building Ahead of Fed Rate Cut Decision

The EUR/USD pair is poised for a near-term bullish breakout as diverging monetary policies, softening U.S. labor data, and Eurozone resilience converge to create a compelling case for euro strength. With the Federal Reserve signaling rate cuts in 2025 and the European Central Bank maintaining a cautious stance, the cross is testing critical technical levels that could catalyze a sustained rally.

U.S. Labor Market Weakness: A Catalyst for Fed Easing

The U.S. labor market, once a pillar of economic resilience, is showing signs of strain. September's nonfarm payrolls added 119,000 jobs, but the November ADP Employment Report revealed a sharp contraction of 32,000 private-sector jobs, driven by steep losses in small businesses and key industries like manufacturing and professional services. This marks a stark reversal from October's revised 47,000 gain and underscores a hiring slowdown fueled by cautious consumer behavior and macroeconomic uncertainty.

The ADP data also highlights a deceleration in pay growth, with job-stayers seeing a 4.4% year-over-year increase-down from 4.5% in October. While the official nonfarm payrolls for November will not be available until December 16, the ADP report suggests the Fed may face mounting pressure to cut rates in early 2026 to support a cooling labor market.

Eurozone Resilience: A Counterbalance to U.S. Weakness

Germany's inflation rate climbed to 2.6% in November-the highest since February 2025-while France and Italy reported lower readings at 0.8% and 1.1%, respectively. This divergence within the Eurozone highlights the bloc's ability to absorb sector-specific pressures without triggering a broad policy shift. The ECB's decision to hold rates contrasts sharply with the Fed's dovish pivot, creating a policy divergence that favors the euro.

Policy Divergence and Inflation Dynamics

The Fed's anticipated rate cuts, coupled with the ECB's restraint, are amplifying the EUR/USD bullish case. U.S. PCE inflation is expected to rise to 2.8% year-on-year in November 2025, up from 2.7% in August. While this remains within the Fed's 2% target range, the lack of aggressive disinflationary progress may justify further easing. Meanwhile, the Eurozone's core inflation at 2.4% suggests the ECB can afford to wait for more definitive signs of disinflation before acting.

This divergence is reflected in market positioning. The EUR/USD CFTC positioning report for November 2025 shows growing bearish sentiment toward the euro, with speculators increasing dollar-long positions amid global risk-off sentiment. However, overbought short positions could trigger a short-covering rally if the pair retests key support levels like 1.1480.

Technical and Geopolitical Tailwinds

Technical indicators reinforce the bullish case. The EUR/USD has rebounded from the 50-day EMA and is testing the 1.16 support level-a critical point within its multi-week trading range. The RSI is at 40, indicating bearish control, but a break above the 21-day EMA at 1.1593 could confirm a sustained rally. Additionally, the pair's retest of 1.1641 and 1.1747 resistance levels suggests potential for a resumption of the broader uptrend if the Fed's rate cuts are perceived as insufficient to curb inflation.

Geopolitical factors further tilt the odds in favor of the euro. The U.S. government shutdown and uncertainty around Trump's proposed tariffs have heightened market volatility, driving risk-averse capital toward the euro as a relative safe haven. Meanwhile, large-scale U.S. manufacturing investments-such as Stellantis's $13 billion expansion and Apple's $100 billion manufacturing push-signal long-term confidence in the sector but do little to offset near-term labor and inflationary headwinds.

Conclusion: A Strategic Bullish Outlook

The EUR/USD case is gaining momentum as U.S. labor and inflation data point to a Fed pivot, while the Eurozone's stable growth and inflation dynamics provide a counterbalance. Technical indicators and geopolitical risks add further support to a near-term bullish outlook. Traders and investors should closely monitor the December 16 nonfarm payrolls release and the Fed's January 2026 policy meeting for confirmation of this trend. For now, the EUR/USD appears well-positioned to capitalize on diverging central bank trajectories.