EUR/USD Soars as ECB Holds Steady While Fed Tips Toward Dovish Shift: Bullish Momentum and Macro Catalysts

The EUR/USD pair has surged to a five-month high above 1.1400, driven by a widening divergence between the European Central Bank (ECB) and U.S. Federal Reserve (Fed). While the ECB has cautiously ended its easing cycle, the Fed's pivot toward a more dovish stance amid U.S. economic softness is fueling euro strength. Technical momentum and upcoming macro events position EUR/USD for further gains, making a long position attractive for traders.

ECB's Caution Signals Cycle End, Bolstering EUR

The ECB's June 2025 decision to cut rates by 25 basis points to 2.00% marked its eighth reduction since mid-2024. However, the central bank's cautious tone suggests this may be the final move in its easing cycle. ECB President Christine Lagarde emphasized a “data-dependent” approach, with policymakers now wary of overstimulating an economy showing resilience.

Key factors underpinning the ECB's pause:
- Inflation dynamics: Headline inflation is projected to average 2.0% in 2025, with core inflation stabilizing at 2.4%, reflecting moderating wage pressures.
- Growth outlook: Eurozone GDP growth is expected to reach 0.9% in 2025, bolstered by government spending in defense and infrastructure.
- Policy divergence: The ECB's neutral stance contrasts sharply with the Fed's uncertain path, reducing downward pressure on the euro.

Fed's Dovish Shift Weakens USD

In contrast, the Fed remains trapped between persistent inflation and a weakening U.S. economy. While the Fed held rates at 4.25%-4.50% in June, it faces mounting calls to cut rates amid trade policy-induced inflation risks and softening GDP growth.

Critical factors undermining the USD:
- Trade policy uncertainty: U.S. tariffs have elevated import costs, threatening consumer spending and corporate profits.
- Market expectations: Futures markets now price in a 62% chance of a September Fed cut, with two cuts by year-end.
- Balance sheet adjustments: The Fed's slowed balance sheet runoff (now $5 billion/month for Treasuries) signals liquidity support, further pressuring the dollar.

Technical Analysis: EUR/USD Targets 1.1600-1.1800

EUR/USD has broken above resistance at 1.1400—a key psychological level—driven by improving momentum:
- Moving averages: The 20-day MA (1.1250) has crossed above the 50-day MA (1.1180), confirming a bullish trend.
- RSI: The 14-day RSI stands at 60, indicating neutral-to-bullish momentum without overbought extremes.
- Fibonacci extension: A break above 1.1450 (the 61.8% retracement of the 2024-2025 decline) could target 1.1600 (76.4%) and 1.1800 (100%).

Investment Strategy: Long EUR/USD with Strategic Stops

Traders should consider establishing a long EUR/USD position, leveraging the ECB-Fed divergence and technical momentum.

Entry: Buy near 1.1400-1.1450, with a stop-loss below 1.1300.
Target: 1.1600 initially, with upside potential to 1.1800 by year-end.
Risks: Monitor U.S. inflation data and Fed rhetoric; geopolitical risks (e.g., energy supply) could temporarily weaken the euro.

Catalysts Ahead: ECB and Fed Meetings

The next ECB meeting on July 24 and Fed's September policy decision will test the euro's resilience. A Fed cut or delayed tightening would amplify EUR/USD gains, while ECB hawkishness (unlikely) could limit losses.

Conclusion

The ECB-Fed policy split has created a compelling bullish case for EUR/USD. With the eurozone's growth holding steady and the Fed's dovish bias intensifying, traders are well-positioned to capitalize on this trend. Stay long EUR/USD, but remain vigilant to macro surprises and technical pullbacks.