EUR/USD at 1.1600: The Structural Dollar Favorability Thesis

The immediate catalyst for EUR/USD's move to 1.1600 is a clear shift in the fundamental narrative, driven by a pair of robust U.S. economic data points. In December, Industrial Production rose 0.4%, significantly exceeding the 0.1% estimate. This was followed by a drop in Initial Jobless Claims from 207K to 198K. Together, these figures signal a labor market and industrial sector that are holding up better than previously thought.

This data has solidified the Federal Reserve's stance of deliberate patience. With the economy demonstrating resilience, the case for near-term rate cuts has been materially reduced. As a result, the outlook for further Fed easing has dimmed, providing a direct tailwind for the U.S. dollar. This fundamental support is now in lockstep with the technical breakdown. The pair has broken decisively below key moving averages on the daily chart, trading beneath the 21-day SMA near 1.1707 and the 50-day and 100-day SMAs clustered around 1.1660-1.1665. This confluence of fundamental strength and technical weakness has reinforced a bearish structure, leaving the euro vulnerable to further downside pressure.

The Political and Policy Landscape

Beyond the data, the institutional and political environment is now actively reinforcing the dollar's structural favorability. A key source of potential policy uncertainty has been muted. White House National Economic Council Director Kevin Hassett's comments this week helped ease investor concerns over recent political noise surrounding the Fed. Speaking to Fox Business, Hassett dismissed the significance of cost overruns cited by Chair Jerome Powell, attributing them to factors like asbestos. His statement that there is "nothing to see here" effectively reduced the risk of a disruptive Fed chair succession debate, allowing the central bank's policy narrative to take center stage.

That narrative is one of deliberate caution. Vice Chair Michelle Bowman's recent remarks underscore the Fed's forward guidance. She signaled that rate cuts are only for if the labor market deteriorates significantly, warning that conditions could change quickly. Her key point was that the Fed should remain ready to adjust policy to bring the labor market closer to neutral, but also avoid signaling a pause without clear evidence of changing conditions. This language frames the current pause not as a commitment to higher rates, but as a necessary wait-and-see stance, which in practice supports the dollar by keeping the door to further easing firmly closed for now.

This sets up a clear economic split that the Fed is watching. On one side, higher-income consumers are continuing to spend, providing a floor for growth. On the other, lower-income households are cutting back on non-essentials, a sign of financial strain. This divergence creates a fragile labor market that is near full employment but increasingly vulnerable. The Fed's baseline expectation is for economic activity to expand at a solid pace and for the labor market to stabilize, but it is explicitly watching for signs of deterioration. For the dollar, this means the path to further easing is now tied directly to a weakening in the U.S. jobs picture, a condition that is not yet evident. The current setup favors the dollar by making its strength a function of U.S. economic resilience, not a policy-driven retreat.

Forward Scenarios and Key Watchpoints

The bearish setup for EUR/USD is now clear, but the path ahead hinges on a few critical inflection points. The base case remains a continuation of the downtrend, with the pair vulnerable to a test of the 1.1350–1.1300 support zone. A decisive break below that level would open the door to the next targets at 1.1200 and then 1.1100. This scenario is supported by the persistent structural advantage for the dollar, driven by a resilient U.S. economy and a dovish ECB that is pricing in earlier and deeper rate cuts.

Yet the primary risk to this thesis is a sharp reversal in the U.S. fundamental narrative. The most immediate watchpoint is inflation data. The December CPI rose 2.7%, unchanged from the prior month and in line with estimates. This stagnation is a red flag. If core inflation measures show signs of stalling or re-accelerating, it could reignite concerns about the Fed's ability to achieve its 2% target. That would directly challenge the dollar's recent strength, which is predicated on the view that the Fed can afford to wait. Tariffs are cited as a key upward pressure, and any evidence that this pass-through is accelerating would be a major negative for the dollar's favorability.

A second, more political catalyst is the resolution of the Fed Chair succession. The process has become unexpectedly uncertain. President Trump's recent comments, where he called the prospect of shifting National Economic Council Director Kevin Hassett from his current role "a serious concern", have thrown the timeline into flux. The decision was expected before the Davos summit, but the current hesitation introduces a new source of policy uncertainty. A prolonged or contentious selection process could undermine the Fed's perceived independence and create a temporary headwind for the dollar, regardless of economic data.

In practice, investors should monitor two key sets of data. First, the next U.S. inflation prints, particularly the core CPI and PCE measures, for any deviation from the 2.7% plateau. Second, any official statements or developments regarding the Fed Chair nomination will be a critical sentiment driver. For now, the technical and fundamental structures favor the dollar. But the setup remains fragile, with the bearish thesis dependent on the U.S. economy maintaining its resilience and the Fed's policy path staying on hold. Any stumble in that narrative could quickly alter the trajectory.