Euro's Bull Run: Can 1.20 Be Next?

The euro has been on a steady climb this year, with EUR/USD reaching 1.1659 on June 26—the highest since 2021. As investors weigh the confluence of European fiscal stimulus, U.S. monetary policy uncertainty, and speculative dollar short positions, the question of whether the euro can breach the symbolic 1.20 threshold looms large. This analysis explores the forces driving the euro's ascent and what it means for investors.

The German Fiscal Shift: A Catalyst for Eurozone Growth

Germany's constitutional reform, enacted in early 2025, has unleashed a fiscal stimulus unmatched in decades. The €500 billion infrastructure fund—allocated to transport, energy, and digitalization—will boost Germany's GDP by an estimated 1.25% by 2029, according to the Ifo Institute. Meanwhile, relaxed budget rules for German states and defense spending exemptions have further fueled optimism. This shift from austerity to growth-oriented policies has sent German bond yields soaring (the 10-year Bund rose 43 bps to 2.84% post-announcement), signaling renewed confidence in Europe's economic engine.

The spillover effects are already visible. The Ifo Institute upgraded Germany's 2026 GDP growth forecast to 1.5%, while Eurozone GDP is projected to gain 0.75% by 2035. This synchronicity of fiscal and monetary support (the ECB has maintained a hawkish tilt despite slowing inflation) creates a tailwind for the euro.

The Fed's Losing Battle for Independence: Dollar's Downward Spiral

While Europe is firing on all cylinders, the U.S. dollar faces existential headwinds. President Trump's relentless criticism of Fed Chair Jerome Powell—labeling him “terrible” and “hardheaded”—has eroded confidence in the Fed's independence. Markets now speculate about a Trump-nominated Fed chair who might prioritize short-term growth over inflation control.

This political interference has sent the dollar index plummeting 8% since January 2025. Gold has surged to $2,000/oz, and EUR/USD has benefited from the dollar's safe-haven erosion. The Fed's dilemma is stark: maintaining its hawkish stance risks stifling growth, while yielding to political pressure risks further credibility loss.

Technical Indicators: A Bullish Momentum Play

Technical traders are watching key levels closely. The EUR/USD pair has broken above the 1.16 resistance, with the 14-day RSI at 68—near overbought territory but not yet signaling exhaustion. The MACD histogram remains positive, and Fibonacci retracements suggest the next target is 1.17, followed by 1.18.

Analysts at ING note that a sustained move above 1.17 could unlock the 1.20 threshold, especially if geopolitical risks (e.g., U.S.-China trade tensions) further weaken the dollar. Meanwhile, short positions on the dollar have hit record levels, with 83% of traders betting against the greenback—a classic contrarian signal, though this time fundamentals align with sentiment.

Investment Implications: Positioning for Euro Gains

The convergence of fiscal stimulus, policy uncertainty, and technical momentum creates a compelling case for euro appreciation. Investors should consider:

1. Going Long on the Euro: Use ETFs like the CurrencyShares Euro Trust (FXE) or futures contracts to capture the upside.
2. Shorting USD-Correlated Assets: Reduce exposure to USD-denominated bonds or commodities tied to the dollar's strength.
3. Sector Plays: European equities (e.g., DAX components) and gold miners (which benefit from both euro strength and inflation) could outperform.

Risks and Considerations

• Fed Policy Shifts: A sudden hawkish turn by the Fed or improved U.S. data could reverse the dollar's decline.
• Geopolitical Volatility: Escalation of Middle East tensions or a U.S.-China trade deal could reintroduce safe-haven demand for the dollar.
• Execution Risks in Europe: Germany's infrastructure projects may face bottlenecks, tempering growth expectations.

Conclusion

The euro's path to 1.20 is paved with fiscal expansion in Europe, political turmoil in the U.S., and technical momentum. While risks exist, the confluence of these factors suggests the euro could test its 2021 highs—and beyond—by year-end. Investors ignoring this trend may find themselves on the wrong side of a historic currency shift.

Final caveat: Monitor EUR/USD's performance at key resistance levels (1.17, 1.18) and the Fed's policy stance for confirmation of this bullish narrative.