Euro Rally Builds: EUR/USD Targets 1.2000 on Dovish Fed

The euro is gaining momentum against the U.S. dollar as traders price in widening policy divergence between the Federal Reserve and the European Central Bank. EUR/USD has surged nearly 14% in 2025, breaking above a multi-year consolidation band between 1.0500 and 1.1000 and now holding near 1.1700. With technicals and fundamentals aligned, a move toward the psychologically important 1.2000 level — last seen in 2021 — is increasingly likely.

Richmond Lee, CFA and Senior Market Analyst at PU Prime commented:

EUR/USD remains supported as the U.S. dollar index (DXY) struggles near 97.35, reflecting persistent pressure on the greenback. With markets already pricing in a 25 bps Federal Reserve rate cut, sentiment has shifted toward the possibility of a larger move by year-end 2025. This dovish outlook is eroding dollar demand and strengthening the euro’s appeal.

The upcoming U.S. retail sales report will be pivotal. A weaker reading would likely reinforce expectations of deeper Fed easing, further weighing on the dollar and boosting EUR/USD. While a strong surprise could slow the pair’s advance, dollar fundamentals remain tilted toward weakness, keeping the near-term bias upward for EUR/USD.

Fed Rate Cuts Back on the Table

The Fed is preparing for its first rate cut in almost a year, with futures markets assigning a 95% chance of a 25 bps move at the September meeting. The U.S. benchmark rate has remained at 4.25–4.50% since December 2024, but weakening labor data is shifting sentiment. August’s jobs report showed only 22,000 positions added, well short of expectations, while unemployment has climbed to 4.3%. Powell’s Jackson Hole remarks acknowledged a “marked slowdown” in employment, reinforcing the dovish pivot. Markets now price in 75–100 bps of cuts by year-end, a sharp shift that erodes the dollar’s yield advantage.

ECB Signals End of Cutting Cycle

The ECB has already cut by 200 bps since mid-2024, bringing the deposit rate down to 2.00%. President Lagarde has suggested the easing cycle is nearly complete, noting that rates are “well-positioned” for current conditions. With eurozone inflation back at 2%, the central bank can afford to pause. While one or two further cuts are possible, the ECB is in a holding pattern, in sharp contrast to the Fed’s impending easing. This divergence makes long-euro positions attractive, particularly as European fundamentals improve.

Eurozone Stability vs. U.S. Inflation Pressures

U.S. GDP expanded 3.3% in Q2, but growth is feeding sticky inflation. Core PCE remains at 2.9%, limiting the Fed’s flexibility. The eurozone, by contrast, has stabilized inflation at target, giving policymakers breathing room. Labor dynamics also favor Europe: eurozone unemployment is steady at 6.2%, while the U.S. labor market is showing cracks. Historical data revisions have erased nearly 1 million jobs, reinforcing the perception of slowdown.

Germany has announced nearly €1 trillion in defense and infrastructure spending, boosting the growth outlook and complementing the ECB’s less aggressive stance. Meanwhile, U.S. fiscal and trade policy complicates the Fed’s task. Broad tariffs — 10% on all imports, with higher rates for certain countries — are set to add 0.8–2.2 percentage points to core inflation. This asymmetric effect hurts the U.S. more than Europe: ECB research shows such tariffs may cut eurozone growth by 0.3–0.5 percentage points, but inflationary impact is muted.

Technical Breakout Reinforces Bullish Bias

EUR/USD has decisively broken out of its multi-year 1.0500–1.1000 range and is consolidating near 1.1720. Resistance is seen at 1.1830, a key breakout trigger. Above that, Fibonacci extensions from the 2022 low at 0.9534 point to resistance at 1.1916 and 1.2019 — both converging with the 1.20000 target. A confirmed breakout above 1.1830 would validate the next bullish leg.

Institutional reallocation is reinforcing the bullish setup. European pension funds, if returning to 2015 allocation levels, could drive up to $217 billion in USD selling. Major banks are also backing the move higher: Morgan Stanley projects 1.2000–1.2500 by mid-2026, while Goldman Sachs sees similar upside. With Fed easing expected into year-end and the ECB largely on hold, positioning remains skewed toward euro strength.

Risks That Could Derail Euro Momentum

Risks remain. JPMorgan warns of eurozone fragility and continues to forecast EUR/USD parity by early 2025. Sovereign debt burdens are also a concern: France’s debt-to-GDP stands at 112% and Italy’s at 137%, leaving both vulnerable to rising yields. A stronger-than-expected U.S. economy, fueled by further tax cuts or fiscal expansion, could also restore dollar strength. Geopolitical risks — from Ukraine to Middle East tensions — may trigger safe-haven demand for the dollar. On the charts, failure to break 1.1830 would risk trapping longs and prompting a pullback.

The widening policy gap creates opportunities for medium-term positioning. Traders may look at long EUR/USD via spot, futures, or ETFs, with 1.1830 as a key breakout level to monitor. Diversified exposure into eurozone equities or currency-hedged assets may also offer risk-adjusted returns. However, FX markets remain volatile, and risk management is crucial given political uncertainty and tariff-driven inflation pressures in the U.S.

Bottom line: Bullish EUR/USD Toward 1.2000

With fundamentals, policy, and technicals aligned, the bias for EUR/USD remains bullish toward 1.2000 in the medium term. The Fed’s easing cycle is set to weaken dollar support, while the ECB appears near the end of its cuts. German fiscal stimulus adds another supportive layer. A breakout above 1.1830 would likely confirm the next leg higher, with 1.2000 as the primary target. Traders should remain alert to debt risks and geopolitical shocks, but the balance of evidence continues to favor euro strength.