EUR/USD Price Forecast: Correction under way

EUR/USD comes under some fresh selling pressure following overbought levels and helped by the recovery in the US Dollar. Despite the decline, the outlook for the single currency remains positive at the beginning of the year.

EUR/USD came under renewed selling pressure, giving back part of its recent rally beyond the key 1.2000 mark — levels last seen in June 2021. The pair snapped a four-day winning streak as the US Dollar (USD) bounced back, with markets continuing to digest the Federal Reserve’s steady-handed message earlier on Wednesday.

The US Dollar Index (DXY), meanwhile, managed to reverse Tuesday’s sharp slide to four-year lows near the 95.50 area. The rebound was underpinned by a broad-based improvement in US Treasury yields across the curve, offering the Greenback some much-needed support.

Fed: steady rates, steady confidence

The Federal Reserve (Fed) left the Fed Funds Target Range (FFTR) unchanged at 3.50%–3.75% at its January meeting, in line with expectations.

Policymakers struck a slightly more upbeat tone on growth, noting that economic activity continues to expand at a solid pace. While inflation was still described as somewhat elevated and uncertainty around the outlook remains high, the Federal Open Market Committee (FOMC) no longer sees downside risks to employment as increasing. The decision passed with a 10–2 vote, with two members, Miran and Waller, dissenting in favour of a quarter-point rate cut.

At his press conference, Chair Jerome Powell reiterated that the US economy remains on firm footing and that the current policy stance is appropriate. He pointed to signs of labour market stabilisation, with softer job growth reflecting weaker labour demand and slower labour force growth. On inflation, Powell argued that much of the recent overshoot is being driven by tariff-related goods prices rather than demand pressures, while services disinflation continues. He added that tariff effects are likely to peak around mid-year.

Policy decisions, Powell stressed, will remain meeting by meeting, with no preset path. Importantly, he underlined that no one on the Committee sees a rate hike as the base case, noting that risks on both sides of the mandate have eased somewhat.

Adding to the uncertainty, President Trump signalled that a decision on a nominee for the next Fed Chair could come soon, keeping attention firmly on the central bank even beyond this week’s meeting.

ECB: calm, patient, but alert

The European Central Bank (ECB) also stayed on hold at its December 18 meeting, adopting a calmer and more patient tone that has pushed expectations for near-term rate cuts further into the future. Modest upgrades to growth and inflation forecasts helped reinforce that stance.

According to the ECB Accounts published last week, policymakers made it clear there is no urgency to change course. With inflation close to target, they have room to remain patient, even as lingering risks mean flexibility is still required.

Members of the Governing Council (GC) were keen to stress that patience should not be mistaken for complacency. Policy is seen as being in a “good place” for now, but not on autopilot. Markets appear to have taken that message on board, pricing in just over 4 basis points of easing over the year ahead.

Positioning: supportive, but losing momentum

Speculative positioning remains broadly supportive of the Euro, though signs of fading conviction are starting to emerge.

Commodity Futures Trading Commission (CFTC) data for the week ending January 20 show non-commercial net long positions slipping to seven-week lows around 111.7K contracts. At the same time, institutional players trimmed short exposure, now sitting near 155.6K contracts.

Open interest also fell to roughly 881K contracts, snapping a three-week run of increases and suggesting that participation, and confidence, may be thinning.

What’s driving the next move

Near term: The spotlight is likely to remain firmly on the US Dollar (USD) in the wake of the Federal Open Market Committee (FOMC) meeting. On the euro side, markets will be watching Germany’s flash inflation readings and early Gross Domestic Product (GDP) estimates for any fresh signals.

Risks: A more hawkish-than-expected Federal Reserve could quickly tilt momentum back in favour of the USD. From a chart perspective, a clean break below the 200-day Simple Moving Average (SMA) would also raise the risk of a deeper, more sustained correction.

Tech corner

The current pullback in EUR/USD is seen as temporary, while further gains should remain in the pipeline as long as the pair navigates above its key 200-day SMA around 1.1600.

The resurgence of the bullish stance should challenge the 2026 ceiling at 1.2045 (January 28). Once this level is cleared, the pair could shift its focus to the May 2021 peak at 1.2266 (May 25), seconded by the 2021 high at 1.2349 (January 6).

Sellers, in the meantime, face their initial contention in the 1.1680–1.1670 band, where the transitory 55-day and 100-day SMAs are located. Down from here emerges the more significant 200-day SMA at 1.1600, while the break below this region could open the door to a probable trip toward the November 2025 base at 1.1468 (November 5) prior to the August valley at 1.1391 (August 1).

Additionally, momentum indicators point to extra gains. That said, the Relative Strength Index (RSI) hovers around 65, while the Average Directional Index (ADX) near 30 indicates a robust trend.

Bottom line

For now, EUR/USD is being driven far more by what’s happening in the US than by developments in the euro area.

Until the Fed offers clearer guidance on its 2026 rate path, or the eurozone delivers a more convincing cyclical upswing, any upside is likely to unfold gradually rather than morph into a clean, decisive breakout.