EUR/USD Analysis: Elevated Risks Counter Strength

The euro-dollar pair remains stubbornly strong on an annual basis, yet recent weakness hints at growing fragility. This section unpacks those competing forces.

On November 26, 2025, , according to tradingeconomics.com. This year-to-date strength stems from weaker-than-expected U.S. economic data and strong expectations for an upcoming rate cut. Meanwhile, , supported by robust private-sector activity and solid demand for EU exports to the US. Diverging central bank paths – the Fed easing versus the ECB holding rates steady – underpin the euro's gains against the dollar.

However, this annual picture obscures short-term pressure. , signaling near-term weakness and liquidity strains within the market. Compounding this fragility is the surge in daily foreign exchange turnover. Global OTC FX trading volumes spiked , . While this heightened activity reflects increased market engagement, particularly in spot transactions and outright forwards, it also underscores the market's amplified sensitivity to shocks.

The International Monetary Fund (IMF) flags these dynamics as part of a broader structural vulnerability. Its October 2025 report warns that global FX markets possess heightened sensitivity to macrofinancial uncertainty and currency mismatches. The growing participation of nonbank financial institutions further amplifies volatility and widens bid-ask spreads, creating conditions where EUR/USD could experience sharper, more abrupt moves. , . This concentration means dollar liquidity strains disproportionately impact the pair.

The euro's annual strength is undeniable, but the combination of recent monthly weakness, record-breaking turnover volume, and explicit IMF warnings about structural fragility elevates the perceived risk. This signals that near-term volatility could rapidly erode the euro's gains, especially if broader financial stability concerns intensify.

Growth Mechanics vs. Underlying Fragilities

The euro's recent strength finds partial support in surprisingly resilient economic data, though underneath lies a picture of uneven and fragile momentum. , , though final figures remain subject to revision as flash estimates show uneven country performance, with Ireland and Bulgaria leading the way. This growth, however, masks significant sectoral weaknesses. The manufacturing sector, a traditional euro area anchor, has deteriorated sharply, , signaling contraction. This weakness extends beyond a single month, reflecting four consecutive months of declining new orders, a trend analysts view as a key sign of weakening demand and a barrier to sustained expansion. Furthermore, , complicating pricing strategies for manufacturers already facing destocking pressures.

Policy divergence between the US and eurozone has also bolstered the euro recently. The Federal Reserve cut its benchmark rate by 25 basis points to a range of 3.75%-4% in October 2025, citing inflationary risks and preparing for further adjustments based on data, while the ECB held interest rates steady, . This difference in monetary policy stance has made eurozone assets relatively more attractive compared to the US, contributing to the currency's resilience. Market expectations now price in no ECB rate cuts in 2025, contrasting with a modest chance of one cut in 2026, reflecting confidence in the eurozone's underlying inflation dynamics despite the manufacturing slump.

The contradiction within the eurozone economy is stark. While manufacturing grinds lower, other sectors, particularly services, show surprising resilience. , suggesting ongoing pricing power and demand in this vital area. However, reliance on services growth to offset manufacturing weakness is inherently risky. The manufacturing sector's decline, evidenced by the falling PMI and persistent order attrition, represents a fundamental fragility. Analysts warn that without a turnaround in manufacturing sentiment and new orders – both of which are currently trending downward – the expansion lacks a solid foundation. The uneven country performance also means risks are concentrated; if weaker economies falter further, the overall picture could deteriorate faster than current data suggests. While the euro benefits from policy divergence and services resilience, the underlying economic momentum appears fragile and imbalanced, heavily dependent on sectors vulnerable to shifts in consumer and business confidence that lack broad support from the manufacturing base.

Economic Fragility Signs

Eurozone growth faces growing headwinds. The trade surplus with the U.S. shrank dramatically, . . This contraction stemmed partly from weaker chemical and machinery exports amid ongoing U.S. tariff worries. While surpluses held in manufactured goods and food, deficits widened notably in energy and raw materials. Post-Ukraine war, energy imports from the U.S. surged faster than global averages, keeping overall import levels elevated since mid-2022. Such volatility in the surplus underscores underlying economic fragility. The region remains vulnerable to external shocks, including potential U.S. fiscal or financial turbulence as highlighted in the ECB's Financial Stability Review.

Manufacturing orders have also weakened significantly. The Eurozone manufacturing sector signaled trouble . That marked a five-month low and reflected ongoing destocking, falling new orders, and declining employment. The trend of declining export orders persisted for the fourth consecutive month in October. Analysts warn this expansion is unlikely to be sustained for several quarters, citing weak business sentiment and persistent cost pressures. This erosion in manufacturing demand adds to concerns about overall economic momentum heading into the ECB's policy meeting.

Stubborn inflation, particularly in services, complicates the ECB's easing path. in October 2025, . Services inflation, accounting for over 40% of the HICP basket, . according to ECB survey data. This persistent price pressure, especially in the services sector, significantly increases the risk that the ECB will need to maintain tighter policy longer than hoped, potentially stifling any nascent recovery.

Valuation & Downside Catalysts

Following earlier analysis of euro strength, investors now face growing uncertainty that could rapidly reverse gains. Trade tensions remain a material threat, as highlighted in the ECB's Financial Stability Review, which flags persistent policy uncertainty and structural eurozone vulnerabilities like high deficits and dollar exposure as risks to competitiveness and stability. This environment amplifies the danger that sudden shifts could trigger abrupt market reversals.

Policy uncertainty adds another layer. While the ECB projects core inflation at 2.4% and an overall 2.1% mean forecast, . However, . This divergence between headline and core inflation pressures the ECB, delaying rate cuts and keeping borrowing costs elevated longer than market optimism might assume.

Compounding these risks, global currency volatility has surged dramatically. OTC foreign exchange turnover hit $9.6 trillion a day in April 2025, , driven largely by hedging activity around trade policy shifts. , this heightened turbulence creates a volatile backdrop that can quickly undermine asset valuations.

The current outlook presents a clear asymmetry. While annual EUR/USD strength reflects underlying eurozone resilience, near-term risks are mounting. A potential decline in exports due to trade friction, persistent inflationary pressures-especially in services-, and the specter of U.S. fiscal shocks create significant downside scenarios. The surge in daily FX turnover underscores how easily market sentiment could shift, turning complacency into sharp corrections. Investors relying on sustained valuation premiums must weigh these tangible frictions and risks more heavily.