EUR/USD: The 2026 Bull Thesis in a Technical Pause

The euro is consolidating near 1.1720 after a weekend of geopolitical volatility failed to sustain a dollar safe-haven bid. This is a tactical pause, not a reversal. The broader narrative remains one of a multi-year uptrend, set up by a 13.3% rally against the dollar in 2025. The current stalemate reflects a market digesting conflicting signals, but the structural divergence between the US and Eurozone economies is widening.

The core of this divergence is stark. In the United States, economic weakness is deepening and policy is shifting toward easing. The latest data confirms this trend: the ISM Manufacturing PMI fell to a 14-month low of 47.9 in December, marking its tenth consecutive month of contraction. This persistent weakness, coupled with dovish comments from Fed officials like Minneapolis President Neel Kashkari, has pushed expectations for policy easing higher. The dollar's recent strength is a reaction to geopolitical jitters, but it is being offset by fundamental economic data.

Across the Atlantic, the picture is one of slower, but still positive, expansion. The Eurozone HCOB Composite PMI held at 51.9 in November, indicating the bloc's economy is still growing, albeit at a muted pace. This creates a clear policy divergence. While the Federal Reserve is being forced to consider easing due to a struggling manufacturing sector, the European Central Bank's path remains uncertain, with markets pricing in only modest hikes later in 2026. This differential in economic momentum and monetary policy trajectory is the bedrock of the euro's multi-year rally.

For investors, the current consolidation at 1.1720 is a moment to assess the setup. The euro's technical structure is under pressure, with the pair trading near key support levels. Yet the fundamental shift favoring the euro in 2026 is intact. The US economy's contractionary streak is a vulnerability, while the Eurozone's resilience, however slow, provides a relative floor. The stalemate is temporary; the bigger picture points toward a currency that has already made a powerful multi-year move and is now finding a new equilibrium within that uptrend.

The Policy Divergence: Fed Hesitation vs. ECB Uncertainty

The global monetary policy landscape is showing a clear split, with the Federal Reserve beginning to pivot toward easing while the European Central Bank remains firmly on the sidelines. This divergence is setting the stage for a long-term weakening of the euro, as the U.S. dollar finds support from a dovish Fed and the eurozone faces a prolonged period of stagnation.

The Fed's shift is being driven by mounting concerns over the labor market. Minneapolis Fed President Neel Kashkari has become a vocal advocate for caution, warning of a potential "pop" in the jobless rate. His comments, coupled with a 14-month low in the ISM Manufacturing PMI, have pushed market expectations for rate cuts higher. While money markets still price an 83% probability of a hold at the next meeting, the change in rhetoric signals a policy pivot is becoming more likely. The Fed is moving from a stance of "higher for longer" to one of "higher for now," with officials now describing the labor market as a "low-hiring, low-firing" environment. This growing dovish tilt is a direct response to economic softening, creating a headwind for the dollar's strength.

In stark contrast, the ECB has been in a holding pattern since March 2024, with its key deposit rate held at 2.00%. The central bank's policy is effectively neutral-to-dovish, as reflected in market pricing that expects only 4.7 basis points of rate hikes by the end of 2026. With inflation in the eurozone projected to dip to 2.2% annually by year-end, the ECB has little justification for further tightening. Its wait-and-see approach, combined with persistent economic stagnation-evidenced by the eurozone's HCOB Composite PMI reading of 51.9-creates a policy vacuum that undermines the euro's appeal.

The bottom line is a clear policy divergence with a directional bias. The Fed is responding to domestic economic weakness with a dovish pivot, while the ECB is paralyzed by a lack of clear inflationary pressure and a stagnant growth outlook. This setup favors the dollar and pressures the euro. For investors, the long-term direction is clear: the euro is likely to weaken as the Fed's easing cycle begins and the ECB's inaction fails to provide a counterweight.

Technical Structure and the Path to 1.24

The euro's immediate technical picture is one of a bearish squeeze. The pair is struggling to clear the 1.1750 resistance zone, with a key bearish trend line forming on the 4-hour chart. This structure suggests sellers are in control, pressuring the currency lower. The immediate support level is seen at 1.1725. A break below that level would expose the 20-day Simple Moving Average at 1.1731 and the longer-term 100-day SMA at 1.1668, opening a path toward deeper losses.

The critical level for bulls is 1.17425. A sustained close above this level on the 4-hour chart would invalidate the current bearish scenario, signaling a loss of downside control and potentially opening a path toward 1.1800. For now, the structure favors a continuation of the recent correction from the 1.1800 zone.

This near-term technical setup fits within a broader, more bullish 2026 forecast. The fundamental thesis is a weakening dollar, driven by expected Federal Reserve rate cuts and a softer US economic outlook. This outlook is reflected in a major institutional forecast: MUFG projects EUR/USD to reach 1.2400 by the end of 2026, implying a significant 13.5% gain from current levels. The technical structure here is a temporary headwind within a longer-term trend. The euro's struggle near 1.1750 is a consolidation phase, a necessary pause before the next leg up toward that bullish target. The path forward hinges on the euro clearing its immediate resistance and breaking above the 1.17425 invalidation level, which would align with the fundamental shift in dollar strength.

Catalysts and Risks: The 2026 Watchlist

The bullish case for a weaker dollar and a stronger euro hinges on a clear sequence of events. The primary catalyst is the trajectory of US non-farm payrolls and the broader labor market. Recent data shows a concerning picture, with the six-month average of non-farm payrolls at just 17,000 and the private sector at 44,000. This aligns with Fed Chair Powell's suggestion that monthly jobs figures may be overstated by around 60,000. For the Fed's easing path, this weakness is critical. A sustained slowdown in hiring supports the expectation of further rate cuts, which is a key assumption in forecasts for the dollar to weaken by another 5% in 2026.

Upcoming Eurozone inflation data is the counterpoint. The release of the Harmonized Index of Consumer Prices (HICP) for December is critical. A reading that aligns with expectations-projected to rise from -0.5% month-over-month to 0.4%-would reaffirm the European Central Bank's hold stance. This would maintain the interest rate differential that supports the euro, especially as the ECB's growth outlook improves and inflation is projected to remain near target.

Geopolitical risks remain a persistent drag. The capture of Venezuela's President Maduro last week is a stark example of US policy flashpoints that can create uncertainty. More broadly, the Russia-Ukraine conflict implications could worsen, and tensions in US-China and China-Japan relations, while improved, remain fragile. These factors act as a constant source of volatility and a headwind for global growth.

The key risk to the 2026 thesis is stronger-than-expected US labor market data. If the jobs figures prove resilient, it could slow the Fed's easing path and limit the dollar's weakness. As noted, the real threat to the outlook would be unexpected strength in the jobs market. This would challenge the core assumption of a dovish Fed and could stall the structural shift toward a weaker dollar. For now, the data suggests the path is clear, but the market's focus on the next payrolls report will test the setup.