US Dollar Slips On Central Bank Divergence. Forecast as of 12.09.2025
With the ECB pausing and the Fed resuming its cycle of monetary expansion, the EURUSD pair’s trajectory will depend on the US central bank and economic data. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The ECB has confirmed that the cycle is over.
- The Fed has made a decision.
- Divergence is putting pressure on the US dollar.
- Long trades opened on the EURUSD pair at 1.165 can be increased.
Weekly US Dollar Fundamental Forecast
The ECB has completed its monetary easing cycle, while the Fed is beginning to cut rates. If the divergence in monetary policy has any implications for the Forex market, it is likely to be reflected in the EURUSD pair, which is expected to increase. Indeed, the yield differential between US bonds and their German counterparts remains substantial. Historically, a narrowing spread has boosted the euro. However, this scenario only works if political, geopolitical, and other factors are absent.
US-EZ Policy Rate Gap and 10-Year Treasury Yield
Source: Bloomberg.
The September meeting of the Governing Council was rather dull. As expected, the European Central Bank left its deposit rate unchanged at 2% for the second time in a row after a series of eight cuts since June 2024. The upward revision of the consumer price forecast for 2026 from 1.6% to 1.7%, expectations of GDP growth of 1.2% this year and 1% next year, as well as Christine Lagarde’s rhetoric, convinced investors that the cycle was coming to an end.
According to Lagarde, inflation is where the ECB wants it to be, trade uncertainty has clearly decreased, and the risks of an economic slowdown have diminished. Monetary policy appears to be in line with the EU regulator’s plans.
If one central bank has halted its cycle, the currency pair becomes directly dependent on the actions of the other financial regulator. The Fed looks like it is a goalkeeper trying to save a penalty kick. The US labor market is cooling, and inflation accelerated in August to its highest level since the beginning of the year. However, in reality, the goalkeeper has already decided which way to jump.
US Inflation Rate
Source: Wall Street Journal.
This year, the Fed has been assessing whether the acceleration of inflation due to tariffs has a transient nature or is a long-term process that requires maintaining high interest rates.
The latter option pertains to scenarios where laborers expressing concerns regarding rising prices seek higher wages. However, if the labor market slows, this scenario is out of consideration. Import duties will only temporarily increase the CPI and the PCE index, implying that it is the right time to proceed with monetary policy easing.
Assuming a level playing field, the ECB’s current stance and a measured reduction in the federal funds rate could boost a rally in the EURUSD pair. The primary uncertainty pertains to the pace of the Federal Reserve’s monetary expansion. However, the path of the main currency pair to new highs will be filled with challenges.
The ongoing political crisis in France, the West’s economic sanctions against Russia, and the subsequent rise in oil prices are likely to have a significant impact on the data, prompting the ECB to reevaluate its stance. The resumption of the cycle of monetary policy easing will be an unpleasant surprise for the euro.
Weekly EURUSD Trading Plan
However, the negative news will likely only trigger corrections. The upward trend in the EURUSD pair remains intact. This means that the long trades formed at 1.165 can be kept open, and the targets at 1.182 and 1.194 are still relevant. The recommendation is to buy.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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