Federal Reserve's Rate Cut Signals Push EUR/USD Higher as Jerome Powell Era Concludes

EUR/USD continues to advance in early Asian trading on Monday, holding steady above the 1.1750 level with prices hovering near 1.1775. The shift in monetary policy dynamics between major central banks is driving the pair’s strength, particularly as markets anticipate changes in US Federal Reserve leadership and ongoing interest rate adjustments.

Powell Transition and Fed Rate Outlook Reshape Dollar Momentum

The upcoming transition away from Jerome Powell’s leadership marks a pivotal moment for Fed policy direction. Powell’s term concludes in May, with President Trump expected to nominate a replacement who may prioritize keeping interest rates low. This policy orientation represents a significant shift from the Fed’s previous tightening cycle, creating headwinds for the US Dollar.

The Federal Reserve’s December decision brought the federal funds rate to 3.50%-3.75%, marking a 25 basis point reduction. Throughout 2025, the central bank delivered 75 basis points in cumulative cuts, responding to labor market softness and moderate inflation pressures. Market pricing now reflects expectations for two additional rate reductions in 2026, a scenario that would further weaken the Greenback and provide tailwinds for EUR/USD.

Trump’s public statements regarding his preferred Fed Chair indicate a preference for persistently low interest rates, suggesting the new leadership may maintain an accommodative stance into 2026. This prospect directly pressures the Dollar, as lower US rates typically reduce the currency’s appeal to international investors seeking higher yield opportunities.

European Central Bank’s Cautious Stance Provides Support

Meanwhile, across the Atlantic, the European Central Bank has adopted a more measured approach to rate adjustments. During their recent policy meeting, the ECB maintained interest rates unchanged and signaled that this holds-steady positioning may persist through the near term.

ECB President Christine Lagarde emphasized that forward guidance on future rate moves remains uncertain, with the institution adopting a flexible, data-dependent framework for each meeting. While money markets have priced in roughly a 25 basis point reduction by February 2026, such expectations remain below 10% probability, indicating limited conviction in near-term cuts.

This contrast—with the Fed potentially accelerating cuts while the ECB delays reductions—creates favorable conditions for Euro strength. The indication that the ECB’s cutting cycle may be approaching its conclusion provides fundamental support for the shared currency during this period.

Key Economic Releases and Market Drivers

US Pending Home Sales data for November will be published later on Monday, providing insight into domestic demand dynamics. This release joins a calendar of important indicators that will continue shaping Fed policy expectations and, consequently, EUR/USD directional bias.

Understanding the Euro and Its Market Dynamics

The Euro serves as the official currency for 20 European Union member states within the Eurozone, establishing itself as the second most actively traded currency globally after the US Dollar. In 2022, Euro transactions accounted for 31% of all foreign exchange activity, with daily turnover exceeding $2.2 trillion.

EUR/USD maintains its position as the world’s most heavily traded currency pair, representing approximately 30% of all forex transactions. This dominance reflects the pair’s importance as a barometer for global risk sentiment and monetary policy divergence.

The ECB, headquartered in Frankfurt, functions as the central bank for the Eurozone and establishes interest rates while managing monetary policy across the region. The ECB’s governing structure includes heads of Eurozone national central banks and six permanent members, with Christine Lagarde serving as President. Interest rate policy remains the institution’s primary tool for achieving its mandate of price stability.

Inflation, tracked via the Harmonized Index of Consumer Prices (HICP), represents a critical metric for ECB decision-making. Should inflation exceed the ECB’s 2% target, the institution typically responds by raising rates. Conversely, relatively elevated interest rates enhance the Euro’s attractiveness to global capital flows, strengthening the currency.

Broader economic indicators—including GDP growth, manufacturing and services PMI data, employment figures, and consumer confidence metrics—all influence Euro trajectory. Economic strength in the Eurozone’s four largest economies (Germany, France, Italy, and Spain), which represent 75% of total Eurozone output, carries particular significance.

The Eurozone Trade Balance also moves the Euro, as positive export balances reflect demand for the region’s goods and services, attracting foreign currency inflows that appreciate the Euro.