2025 H2 Euro Outlook: EUR/USD Bulls Snap Decade-Long Downtrend

Key points for the Euro 2025 H2 outlook

• Euro closes 2025 H1 up more than 13% - rally extends near four-year highs
• FOMC trims growth & employment outlook / raises inflation expectations- two interest rate cuts expected
• ECB nearing end of easing cycle as inflation falls below target
• EUR/USD breakout approaching technical trend resistance into July open
• Risk for topside exhaustion- outlook constructive while above 2024 highs

Euro closed the first half of 2025 at fresh yearly highs with a breakout of multi-year downtrend in April extending into the close of June. The rally takes weekly momentum into overbought territory and marks the first six-month advance in the euro since 2017. While the broader outlook remains constructive, the move may be vulnerable to exhaustion heading into Q3, and a pullback could offer more favorable opportunities within the context of the larger multi-year uptrend. Battlelines drawn for the EUR/USD heading into the close of the year.

Federal Reserve Spotlight  

The Federal Reserve left interest rates unchanged in the first half of the year as concerns over the proposed U.S. tariffs and an escalating trade war trumped better than expected inflation data. The December interest rate dot-plot showed committee members anticipating a more accelerated rate-cutting regime with 15 of the 19 members calling for rates below 4% by the end of 2025. The updated June projections showed a profound shift with only 10 members now expecting rates sub-4% this year.

FOMC Interest Rate Dot Plot

 
Source: FOMC

Despite the backdrop of fewer cuts / higher rates this year, the U.S. Dollar has remained under pressure with EUR/USD up nearly 13.7% year-to-date. Although inflation data in the first half of the year has remained surprisingly tame (headline CPI at 2.4% y/y & Core PCE at 2.7% y/y), Federal Reserve Chairmen Jerome Powell continued to suggest the tariff impact remains to be seen with the full scope of higher input prices still unclear. Heading into the start of July Fed Fund Futures are pricing a 92% chance for at-least another two-25basis point cuts by December (taking the target rate to 3.75-4%), with 60% calling for a three-cuts this year.

FOMC Summary of Economic Projections

Source: FOMC

The June Summary of Economic Projections echoed this sentiment with the central bank lowering the growth and employment outlook while raising expectations for higher inflation later this year. The “risk to both sides of its dual mandate” puts the central bank ‘between a rock and a hard place’ and while the underlying strength of the market may justify lower rates, concerns over the potential impact of tariffs may continue to limit the Fed’s willingness to ease. For the U.S. Dollar, a further delay in rate-cuts may offer a glimmer of hope as the DXY slips to fresh three-year lows.

ECB Done Cutting Rates?

In June, the European Central Bank cut interest rates for an eighth-time since June of last year as inflation declined to 1.9% in May, falling below the 2% target for first time since September. Lower energy prices are expected to help contain inflationary pressures with the ECB’s preferred gauge—the Harmonised Index of Consumer Prices (HICP)—projected to close the year at target.

At the same time, growth prospects have remained anchored with the latest Real GDP projections steady 0.9% y/y. The central bank has signaled a cautious, data-dependent approach moving forward and suggests the ECB may be nearing the end of its easing cycle- a potential tailwind for the Euro heading into the close of the year.

Source: ECB

The interest rate outlook from both the ECB and the FOMC points to continue pressure on the USD and while the EUR/USD breakout maintains a broader bullish bias, the sharpness of the recent rally leaves the bulls vulnerable to potential exhaustion. A pullback may offer more attractive opportunities heading into the second half of the year.  

Euro Price Chart – EUR/USD Monthly

Chart Prepared by Michael Boutros, Sr. Technical Strategist; EUR/USD on TradingView

Euro continues to trade within the confines of an ascending pitchfork formation extending off the 2022 low with a break through the 2008 trendline in April fueling a rally of more than 15.7% off the yearly lows. The advance extended through the median-line into the close of June with the bulls now eyeing major resistance at 1.1917-1.2020- a region defined by the 100% extension of the 2022 advance and the 38.2% retracement of the 2008 decline. The focus heading into Q3 is on a reaction off this pivot zone IF reached with the broader outlook constructive while above the 2020 low-month close (LMC) at 1.1033.

Euro Price Chart – EUR/USD Weekly

Chart Prepared by Michael Boutros, Sr. Technical Strategist; EUR/USD on TradingView

A closer look at the weekly chart shows price trading within the confines of a modified ascending pitchfork extending off the 2022 & 2025 yearly lows with the upper parallel highlighting initial resistance-  currently near 1.1830s. A breach / close above 1.2020 is needed to fuel the next major leg of the ascent with subsequent resistance objectives seen at the 2021 high-week close (HWC) at 1.2227 and the 2018 high at 1.2456-look for a larger reaction there IF reached.

Initial weekly support rests with the March 2020 / 2022 high at 1.1497 and is backed closely by the April high-week close (HWC) at 1.1365. Key support rests with the 2024 high-close / May low-week close at 1.1163- note that this level converges on the median-line into the close of the year and losses would need to be limited to this slope IF Euro is heading higher on this stretch.

Bottom Line: Euro is approaching uptrend resistance heading into the second half of the year with weekly momentum deep in overbought territory- risk for topside exhaustion / price inflection on a stretch towards 1.1917-1.2020 IF reached. From a trading standpoint, look to reduce portions of long-exposure / raise protective stops on a stretch towards the upper parallel- losses should be limited to 1.1163 IF Euro is heading higher on this breakout with a close above 1.2020 needed to fuel the next major leg of the advance.

--- Written by Michael Boutros, Sr Technical Strategist with FOREX.com

Follow Michael on X @MBForex