EUR/USD: Navigating Sentiment Shifts Amid Fed Policy Uncertainty

The EUR/USD pair has entered a pivotal phase in 2025, driven by diverging monetary policy trajectories between the European Central Bank (ECB) and the Federal Reserve (Fed). With the euro strengthening to 1.1638 as of December 5, 2025-a 10.12% annual gain-market participants are recalibrating their strategies ahead of the Fed's December FOMC decision. This analysis explores how dovish expectations, Powell's waning influence, and technical dynamics are reshaping USD dynamics, while identifying tactical entry points for traders navigating post-Fed volatility.

Diverging Policy Paths and EUR/USD Fundamentals

The euro's resilience stems from a stark policy divergence. The ECB has signaled it will maintain rates at 2.15% through 2026, as Eurozone inflation remains stubbornly above its 2% target at 2.2%. Meanwhile, the Fed is widely anticipated to cut rates by 25 basis points in December, with further reductions priced in for 2026. This asymmetry has bolstered the euro, supported by robust Eurozone economic data: the composite PMI hit a 15-month high in November 2025, reflecting the fastest private-sector expansion since May 2023.

The Fed's internal divisions, however, introduce uncertainty. Five of the 12 FOMC voting members have expressed skepticism about additional rate cuts, complicating market expectations. Chair Jerome Powell's term ends in May 2026, and his successor-likely Kevin Hassett-could alter the Fed's messaging, adding to volatility. This policy ambiguity has led to a 87% probability of a December rate cut, per the CME FedWatch tool, but with Powell emphasizing that the decision is "not a foregone conclusion."

Technical Dynamics and the 1.1700 Threshold

From a technical perspective, EUR/USD is testing critical levels. On the H4 chart, the pair is consolidating above 1.1652, with a decisive breakout above 1.1655 potentially targeting 1.1730. The 1.1700 level-a psychological and technical milestone-has historically acted as a pivot point. A sustained close above this level could trigger a retest of 1.1800, while a pullback below 1.1600 may invite short-term bearish pressure. Historical data underscores the significance of 1.1700. In late September 2025, EUR/USD surged past this level following weaker-than-expected U.S. nonfarm payrolls and a 25-basis-point rate cut by the Fed, with the CME FedWatch tool pricing in a 92% probability of further easing. Similarly, in Q4 2024, the pair broke down after Fed rate cuts, but 2025's context differs due to weaker U.S. data and stronger ECB-Fed policy divergence.

Tactical Entry Points and Post-FOMC Volatility

Traders positioning ahead of the December 9-10 FOMC meeting should consider the following strategies:
1. Breakout Above 1.1700: A confirmed close above 1.1700 could signal a new bullish trend. Initial targets include 1.1740–1.1750, with a more aggressive upside at 1.1760. Stop-loss orders below 1.1680 may help manage risk.
2. Consolidation Play: If EUR/USD remains in a 1.1600–1.1700 range, traders could look for long entries near 1.1650, supported by the ECB's dovish neutrality and weak U.S. inflation data.
3. Post-FOMC Reactions: A 25-basis-point rate cut is likely to weaken the USD, pushing EUR/USD toward 1.1730–1.1750. However, a surprise hawkish pivot by the Fed could trigger a sharp reversal, testing 1.1600.

The Fed's credibility is under strain as internal divisions intensify. Powell's era of consensus is fading, with analysts comparing the FOMC's ideological rift to the Supreme Court's partisan dynamics. A dovish transition under Hassett could accelerate rate cuts in 2026, further weakening the USD. Conversely, a hawkish successor might stabilize the dollar, though this scenario appears unlikely given current market pricing.

The euro's long-term strength also hinges on Eurozone economic resilience. While the ECB's cautious stance limits downward pressure on the euro, mixed data-such as services recovery and manufacturing weakness-could introduce volatility. Traders must monitor ECB policy signals alongside Fed developments to avoid misjudging EUR/USD momentum.

Conclusion

The EUR/USD is at a crossroads, with dovish Fed expectations and ECB policy neutrality creating a favorable backdrop for the euro. Traders should prioritize tactical entries around key levels like 1.1700, leveraging both technical and fundamental catalysts. As Powell's influence wanes and the Fed's policy trajectory remains uncertain, the coming months will test the USD's durability-and the euro's potential to break out into a new bullish phase.