EUR/USD Bullish Momentum: Assessing the Case for a Strategic Long Position in the Euro

The EUR/USD pair has emerged as a focal point for currency investors in Q4 2025, driven by divergent monetary policies between the U.S. Federal Reserve (Fed) and the European Central Bank (ECB) and weakening U.S. economic fundamentals. With the U.S. dollar (USD) under pressure and the euro (EUR) gaining traction, the question for investors is whether this environment supports a strategic long position in the euro. This analysis evaluates the interplay of policy shifts, economic data, and technical indicators to determine the euro's potential for sustained strength and the implications for hedgers and currency traders.

Fed Policy Dovishness and U.S. Economic Weakness

The Fed's December 2025 rate cut of 25 basis points, bringing the federal funds rate to 3.50%-3.75%, marked the third consecutive easing in 2025. This dovish pivot reflects a divided FOMC grappling with a slowing labor market and persistent inflation. U.S. GDP growth for 2025 is projected at 1.9%, below the Fed's median forecast of 1.7%, while core PCE inflation remains at 2.9%, well above the 2% target. Weak employment data, including a December ADP Employment Change of -32,000 jobs, has reinforced expectations of further rate cuts in 2026. The Fed's resumption of Treasury bill purchases to maintain liquidity and its acknowledgment of "elevated uncertainty" signal a policy stance increasingly tilted toward accommodation.

ECB's Neutral Stance and Eurozone Resilience

In contrast, the ECB has maintained a firm, data-dependent approach, leaving its deposit rate at 2% through the end of 2026. Eurozone inflation is stabilizing near the 2% target, with headline inflation projected at 2.1% for 2025 and 1.9% for 2026. The region's GDP growth of 1.3% in 2025-supported by a resilient labor market and declining energy prices-has allowed the ECB to avoid aggressive easing. ECB President Christine Lagarde's emphasis on "price stability" and the absence of market expectations for rate cuts have bolstered the euro's appeal. This policy divergence has narrowed the interest rate differential between the U.S. and the eurozone, creating a tailwind for EUR/USD.

EUR/USD Technical and Fundamental Drivers

The EUR/USD exchange rate has broken above key resistance levels, trading near 1.1650 in Q4 2025. Technical indicators, including a bullish RSI and a green MACD histogram, suggest momentum favoring the euro. Fundamentally, the euro's strength is underpinned by the ECB's neutral stance and the Fed's aggressive easing cycle. The CME FedWatch Tool indicates an 88% probability of a 25-basis-point rate cut ahead of the Fed's December 2025 meeting, while the ECB's December 16 meeting is expected to leave rates unchanged. This asymmetry in policy trajectories has pushed the Dollar Index below 99.00, with further downside risks looming.

Strategic Implications for Investors

For currency investors and hedgers, the current environment presents a compelling case for a long EUR position. The euro's relative strength offers opportunities in Euro-denominated assets, including equities and fixed-income instruments. European consumer stocks, for instance, may benefit from lower borrowing costs and improved corporate earnings. Fixed-income investors are also reevaluating U.S. Treasuries, as political uncertainties in the U.S. have eroded the dollar's safe-haven status. Additionally, U.S. investors are diversifying into Euro-based real assets, such as farmland and renewable energy projects, to hedge against dollar volatility.

However, risks remain. The Fed's leadership transition-potentially involving a more dovish chair like Kevin Hassett-could extend the dollar's weakness. Conversely, a surprise hawkish shift or stronger-than-expected U.S. economic data could reverse EUR/USD gains. Investors should also monitor the ECB's response to inflationary surprises, though the likelihood of rate hikes in 2026 appears low.

Conclusion: A Case for Strategic Long Exposure

The confluence of Fed dovishness, U.S. economic weakness, and ECB neutrality creates a favorable backdrop for EUR/USD. With the euro trading near multi-week highs and technical indicators aligned with further gains, a strategic long position in the euro is justified for investors seeking to capitalize on policy divergence and macroeconomic trends. However, prudence is warranted, as market dynamics can shift rapidly in response to geopolitical risks or data surprises. For now, the euro's momentum suggests a continuation of its upward trajectory, making it a compelling asset for those positioned to benefit from the dollar's decline.