EUR/USD Remains Under Pressure as the USD Maintains Its Advantage on Growth and Interest Rate Differentials

EUR/USD has continued its downward trend since peaking around 1.2080 at the end of January, as the divergence in economic prospects between the United States and the Eurozone has become increasingly evident. This movement reflects the current macroeconomic landscape, where the US dollar remains supported by relatively stable growth and inflation that is still above target, while the Eurozone faces slower expansion and lacks sufficient policy momentum to trigger a meaningful shift in expectations.

Recent US economic data suggest that growth has moderated but has not deteriorated significantly. GDP expanded by only 1.4% year-on-year in the fourth quarter, a notable slowdown from the 4.4% recorded in the third quarter, partly reflecting the impact of a prolonged government shutdown that disrupted public spending and investment. Nevertheless, for the full year 2025, the US economy still grew by 2.2%, its lowest pace since 2020 but sufficient to avoid a broad-based recession.

While growth has cooled, inflationary pressures have not fully subsided. Core PCE remained around 3.0% year-on-year, well above the Federal Reserve’s 2% target, forcing the central bank to maintain a cautious stance. At the same time, the US trade deficit in goods and services widened to approximately $901.5 billion in 2025, among the highest levels since records began in 1960, highlighting structural imbalances in external trade. However, with inflation still above target, the Fed’s primary policy focus remains price stability rather than growth stimulus.

The combination of slower but still positive growth and persistent inflation makes it difficult for the Fed to signal an early easing cycle. The “higher for longer” narrative continues to gain traction, keeping US Treasury yields relatively attractive compared to Europe. This yield differential remains a key factor supporting the US dollar and weighing on the euro.

On the other hand, the Eurozone has posted modest growth. The region’s GDP rose by 0.3% quarter-on-quarter in Q4 2025 and approximately 1.5% for the full year. Although the February Flash Composite PMI improved to 51.9 from 51.3 the previous month, indicating a mild expansion in overall activity, the pace of improvement remains insufficient to significantly alter expectations for ECB policy. In an environment of fragile growth, the ECB has less room to maintain a hawkish stance compared to the Fed.

In my view, the near-term outlook for EUR/USD will largely revolve around the policy divergence between the Fed and the ECB. With US policy rates still considerably higher than those in the Eurozone and core US inflation hovering around 3%, the Fed is unlikely to ease policy soon. Conversely, Eurozone inflation has eased to around 1.7% while growth remains modest, giving the ECB limited incentive to maintain a restrictive stance.

Under the base-case scenario, where US growth continues to slow but avoids a sharp downturn and inflation declines only gradually, the US dollar is likely to retain its relative advantage through yield differentials. The euro may only stage a sustained recovery if US economic data weaken sufficiently to push the Fed toward earlier-than-expected rate cuts. For now, the macro balance continues to tilt slightly in favor of the dollar, leaving EUR/USD more prone to sustained pressure than a decisive reversal.