Euro Climbs to $1.764 after U.S. Fed, ECB Diverge on Rates
The euro rallied against the US dollar, hovering around $1.1764 on Monday after the European Central Bank (ECB) and the US Federal Reserve diverged on their positions on interest rates.
The single currency inched close to its strongest level since late September as policy outlooks between the ECB and the Federal Reserve continued to diverge.
The ECB left interest rates unchanged for a fourth straight meeting and signalled that rates are likely to remain at current levels for some time, noting that the eurozone has weathered US tariffs better than expected.
Recent economic data have also surprised to the upside, prompting the ECB to upgrade its growth outlook again following a similar move in September.
Its updated assessment reconfirms that inflation should stabilise at the 2% target in the medium term. The new Eurosystem staff projections show headline inflation averaging 2.1% in 2025, 1.9% in 2026, 1.8% in 2027 and 2.0% in 2028.4
The central bank now forecasts eurozone growth at 1.4% in 2025, up from a prior estimate of 1.2%, while headline inflation is expected to hover around the 2% target through 2028.
In contrast, softer-than-expected US inflation readings have fuelled speculation that the Federal Reserve may begin cutting rates next year, lending further support to the single currency.
The Federal Reserve delivered a widely expected 25-basis-point rate cut in December, bringing the federal funds rate to 3.50-3.75%.
Reacting to the decision, the U.S. dollar fell against major trading peers including the euro, Swiss franc, and Japanese yen. While the accompanying statement and press conference signalled a more cautious stance toward further cuts, the markets expect one 25bps reduction in the first quarter of 2026.
Given the divisions within the FOMC, the Fed’s updated “dot plot” showed a wide dispersion of views, with no clear consensus on the path for rates in 2026. The median dot shows one rate cut in 2026.
While emphasis remains on monetary easing, Fed Chairman Jerome Powell, in his press conference after the decision, suggested that after 75 basis points of cuts since September 2025 and 175 basis points of cuts since September 2024, the current target range “is in a broad range of estimates of neutral value,” and that the committee “is well positioned to wait and see how the economy evolves from here.”
