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EUR/USD rate is caught in a sideways trend
31/10/2025
The euro may need fresh impetus from Europe to gain further momentum
Since the middle of the year, the euro has been trending sideways against the U.S. dollar (USD). After a strong rally in the first half of the year, the currency pair has been trading within a relatively narrow range of 1.16 to 1.18 USD.[1]
One key reason is the interest rate differential. The European Central Bank (ECB) continued to ease monetary policy in the first half of the year, cutting key interest rates several times. The deposit rate is now 2%, whereas the Federal Reserve's (Fed) interest rate corridor remains at 3.75% to 4.00%, despite another rate cut this week. This difference makes dollar investments more attractive to investors and limits the euro's upside potential. This pressure could remain as long as the Fed does not ease policy more significantly or the ECB ends its cycle.
Added to this is the weak economic performance in the Eurozone. While the U.S. economy appears robust, Europe is growing sluggishly. Weak investment activity and declining domestic demand in Europe contrast with stable U.S. consumption. In the currency market, this means that the growth differential is supporting the dollar and limiting sustained euro appreciation.
Investment programmes announced in Germany and other European countries have also failed to provide any support so far. Although billions are set to be invested in infrastructure and climate protection over the next few years, most projects will not begin until 2026 and it will take them years to have an economic impact. However, it is short-term impulses that matter for the markets. Added to this is the fragmented structure of the European capital markets, which could hinder rapid implementation. Even if these investments promote long-term growth, factors such as interest rate differentials and geopolitical risks are expected to overshadow fiscal policy's influence on the exchange rate in the short term.
Trade and political risks are exacerbating the situation. The import tariffs announced by the U.S. government are having a negative impact on the export prospects of European companies. Added to this are political uncertainties in some European countries, which are dampening confidence in the single currency. These factors are limiting positive developments, such as rising real wages and public investment, from providing lasting support for the euro.
“The sideways movement of the euro ultimately reflects balance,” says Xueming Song, currency strategist at DWS. “On the one hand, expectations of a gradual economic recovery in the Eurozone and the prospect of an end to the ECB's easing cycle are providing support. On the other hand, interest rate differentials, the robust U.S. economy and geopolitical risks act as a counterweight.” For instance, there are currently no indications that foreign investors are abandoning American stocks in favour of the Eurozone. The euro could experience further upward momentum when growth momentum in Europe clearly improves or the Fed eases more significantly.
Following a strong rally in the first half of 2025, the euro-dollar exchange rate seems to have entered a period of relative stability
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 10/30/25
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