EUR/USD holds above $1.165 as fiscal divergence supports gains

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EUR/USD market update

Highlights

- EUR/USD consolidates between 1.163 and 1.172 after rallying 11% year-to-date.

- Diverging policy backdrops support the euro as U.S. fiscal concerns weigh on the dollar.

- Growth risks and trade tensions remain the key tests for sustaining the rally.

EUR/USD price dynamics (Source: TradingView)

On the technical side, EUR/USD has traded in a narrowing corridor, with support at 1.163 and resistance near 1.170–1.172. Moving averages have converged around the 1.164–1.165 band, underscoring market indecision, while Fibonacci retracement levels reinforce 1.154–1.163 as a structural floor. Momentum indicators also signal balance: the relative strength index hovers near 52, with rallies toward 60 fading and dips near 40 finding support. This profile points to consolidation rather than directional conviction.

Policy divergence shapes sentiment

Underlying the euro’s resilience is a growing divergence in fiscal and monetary expectations. Eurozone inflation data in France and Italy undershot forecasts, yet investors still expect the European Central Bank to hold steady through year-end. Fiscal spending plans targeting infrastructure and industrial capacity are adding a layer of support, giving policymakers room to remain patient.

By contrast, dollar sentiment has weakened. U.S. fiscal uncertainty, coupled with political wrangling, has fueled skepticism about long-term debt sustainability. Markets have reduced dollar exposure as confidence in U.S. policy steadiness erodes. This shift has reinforced capital inflows into Europe, which investors view as offering stability and diversification.

Still, risks remain for the euro. Growth across the bloc is uneven, with industrial activity sluggish and consumer sentiment fragile. Trade tensions with the U.S., particularly around tariffs, add another potential headwind. A sustained deterioration in growth data or a flare-up in trade disputes could challenge the euro’s durability above the 1.165 handle.

Outlook defined by growth tests

For now, traders are focused on the 1.163–1.172 corridor. A close above 1.172 could open room toward 1.178 and the psychological 1.180 level, while a decisive break below 1.163 would shift attention to 1.159 and 1.154. The balance of risks remains skewed in favor of the euro as long as U.S. fiscal concerns persist, but momentum is capped until Europe delivers stronger growth.

Previously, analysis emphasized the euro’s reliance on policy divergence to sustain gains. That framework remains intact, with fiscal activism in Europe offsetting weaker inflation while U.S. fiscal stress undermines the dollar. What comes next will depend less on central bank signaling and more on whether Europe can generate a consistent growth narrative. Until then, range-bound trading is likely, with tactical swings between support and resistance shaping strategy.

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