The Fed's reversal is imminent; institutions are significantly divided on the euro.
2026-01-13 20:26:40
The US dollar has maintained a strong rebound recently, and the euro-dollar exchange rate has fallen back to around 1.165.
Strong overall US economic data has been enough to suppress market bets on a short-term rate cut by the Federal Reserve. The market's focus is now on the Fed's policy stance—whether it will endorse or overturn the current dovish interest rate pricing logic for 2026.
This reassessment of policy expectations will become the core driving force dominating the euro-dollar exchange rate fluctuations in the short term.
Crédit Agricole has provided forward guidance, predicting that the euro will fall to 1.14 against the US dollar by mid-year, and after a short period of fluctuation and adjustment, will further decline to the 1.10 level by the end of the year.
ING, on the other hand, holds the opposite view, predicting that the euro will break through the 1.20 mark against the dollar.
The US dollar recorded a strong net gain at the start of the year, pushing the euro against the dollar to a low below 1.1620.
Geopolitical maneuvering has been a key factor in recent financial market competition and is expected to continue to be a crucial variable influencing the direction of the foreign exchange market in early 2026.
Meanwhile, the latest economic data released in the United States showed a mixed picture, but the overall strength was enough to lead the market to further lower the probability of a Fed rate cut in January.
Crédit Agricole analysts point out that the Trump administration's push to overthrow Venezuelan President Maduro's regime may reduce the negotiating pressure on Russian President Putin in the Russia-Ukraine conflict, thereby prolonging the duration of the war.
The bank stated bluntly: "In the foreseeable future, the Russia-Ukraine conflict will remain a cloud of uncertainty hanging over the market, continuing to suppress the confidence of businesses and consumers in the Eurozone."
Furthermore, the bank believes that despite the surge in Venezuelan crude oil exports, the Eurozone is unlikely to benefit substantially from the continued decline in energy prices in the short term.
Market position distribution is also a key influencing factor that cannot be ignored.
Crédit Agricole is bearish on the euro, but added: "Based on the foreign exchange positioning data we track, the euro is currently one of the most crowded net long positions among G10 currencies."
ING Group remains firmly bearish on the dollar's future performance: "The dollar's previous 10% drop was more due to investors' foreign exchange hedging operations than to active selling of core assets such as US Treasury bonds and US stocks."
Based on our assessment, the Federal Reserve will have room for another 50 basis points of interest rate cuts in 2026. Coupled with the implementation of German fiscal stimulus policies leading to a faster recovery in the Eurozone economy, the decline in the US dollar is expected to continue.
The bank maintains its core view that the euro will recover to around 1.22 against the US dollar by the end of 2026.
UBS offers a different perspective: "The market is currently pricing in a low probability of a Fed rate cut in January, but if subsequent economic data is disappointing and significantly raises expectations for a rate cut, then the dollar will likely face downward pressure in the short term."
Crédit Agricole reiterated its logic for reassessing the Fed's policy expectations: "If the latest data confirms continued improvement in the US labor market and consumer confidence, and the Federal Open Market Committee remains ambiguous about further easing, then the US interest rate market will inevitably recalibrate its current dovish pricing of the Fed's policy, a process that will directly boost the dollar exchange rate."
Mitsubishi UFJ Financial Group also holds a bearish view on the US dollar, especially given the positive outlook for the euro.
The bank predicts that the European Central Bank will keep interest rates unchanged this year: The bank believes that the ECB will keep policy rates stable in 2026 because even if inflation data is slightly lower than expected, such deviation is not sustainable, and the necessity for further interest rate cuts has significantly decreased as the Eurozone's economic growth stabilizes and recovers.
The bank also mentioned the logic of central bank demand support: it believes that if the proportion of the US dollar in global foreign exchange reserves continues to shrink, the euro will gain a larger allocation share in the process of diversifying the foreign exchange reserves of central banks in various countries.
Although the euro is still the world's second-largest reserve currency, its share is far below the peak level of 28% before the global financial crisis.
With the era of negative interest rates coming to an end and the Eurozone economy stabilizing, central banks around the world will likely resume their efforts to increase their holdings of euro-denominated assets.
In summary, the exchange rate will be dominated by the comparison of economic data between the US and Europe, the policy signals of the Federal Reserve, and the geopolitical situation in the short term; in the medium to long term, attention should be paid to the resilience of the Eurozone's economic recovery, the divergence in monetary policy paths between the US and Europe, and the potential support for the euro from changes in the global reserve currency landscape.
The market may continue to be highly volatile amid a mix of bullish and bearish factors, and the direction will depend on further clarification from key data and policy signals.
Technically, the euro stopped falling and stabilized after reaching the lower edge of the trading range. 1.1600 is a strong support level, and the nearest support is around 1.1644, which is near the lower edge of the trading range.
If the exchange rate holds above 1.1644, the euro/dollar exchange rate will shift from a decline to range-bound trading.
Resistance levels are around 1.1685 and 1.1725.
(EUR/USD daily chart, source: FX678)
At 20:24 Beijing time, the euro was trading at 1.1667/68 against the US dollar.
Strong overall US economic data has been enough to suppress market bets on a short-term rate cut by the Federal Reserve. The market's focus is now on the Fed's policy stance—whether it will endorse or overturn the current dovish interest rate pricing logic for 2026.
This reassessment of policy expectations will become the core driving force dominating the euro-dollar exchange rate fluctuations in the short term.
Institutional outlooks diverge: Bank of France is bearish with a target of 1.10, while ING is bullish with a break above 1.20.
Crédit Agricole has provided forward guidance, predicting that the euro will fall to 1.14 against the US dollar by mid-year, and after a short period of fluctuation and adjustment, will further decline to the 1.10 level by the end of the year.
ING, on the other hand, holds the opposite view, predicting that the euro will break through the 1.20 mark against the dollar.
The US dollar recorded a strong net gain at the start of the year, pushing the euro against the dollar to a low below 1.1620.
Data and Geopolitics: US data weakens expectations of interest rate cuts, Russia-Ukraine conflict drags down Eurozone confidence.
Geopolitical maneuvering has been a key factor in recent financial market competition and is expected to continue to be a crucial variable influencing the direction of the foreign exchange market in early 2026.
Meanwhile, the latest economic data released in the United States showed a mixed picture, but the overall strength was enough to lead the market to further lower the probability of a Fed rate cut in January.
Crédit Agricole analysts point out that the Trump administration's push to overthrow Venezuelan President Maduro's regime may reduce the negotiating pressure on Russian President Putin in the Russia-Ukraine conflict, thereby prolonging the duration of the war.
The bank stated bluntly: "In the foreseeable future, the Russia-Ukraine conflict will remain a cloud of uncertainty hanging over the market, continuing to suppress the confidence of businesses and consumers in the Eurozone."
Furthermore, the bank believes that despite the surge in Venezuelan crude oil exports, the Eurozone is unlikely to benefit substantially from the continued decline in energy prices in the short term.
Positions and Policy: Crowded Euro Long Positions Pose Hidden Risks; Institutions Debate the Prospects of Fed Rate Cuts
Market position distribution is also a key influencing factor that cannot be ignored.
Crédit Agricole is bearish on the euro, but added: "Based on the foreign exchange positioning data we track, the euro is currently one of the most crowded net long positions among G10 currencies."
ING Group remains firmly bearish on the dollar's future performance: "The dollar's previous 10% drop was more due to investors' foreign exchange hedging operations than to active selling of core assets such as US Treasury bonds and US stocks."
Based on our assessment, the Federal Reserve will have room for another 50 basis points of interest rate cuts in 2026. Coupled with the implementation of German fiscal stimulus policies leading to a faster recovery in the Eurozone economy, the decline in the US dollar is expected to continue.
The bank maintains its core view that the euro will recover to around 1.22 against the US dollar by the end of 2026.
UBS offers a different perspective: "The market is currently pricing in a low probability of a Fed rate cut in January, but if subsequent economic data is disappointing and significantly raises expectations for a rate cut, then the dollar will likely face downward pressure in the short term."
Crédit Agricole reiterated its logic for reassessing the Fed's policy expectations: "If the latest data confirms continued improvement in the US labor market and consumer confidence, and the Federal Open Market Committee remains ambiguous about further easing, then the US interest rate market will inevitably recalibrate its current dovish pricing of the Fed's policy, a process that will directly boost the dollar exchange rate."
ECB Policy and Euro Reserve Demand: Supporting the Euro's Medium- to Long-Term Outlook
Mitsubishi UFJ Financial Group also holds a bearish view on the US dollar, especially given the positive outlook for the euro.
The bank predicts that the European Central Bank will keep interest rates unchanged this year: The bank believes that the ECB will keep policy rates stable in 2026 because even if inflation data is slightly lower than expected, such deviation is not sustainable, and the necessity for further interest rate cuts has significantly decreased as the Eurozone's economic growth stabilizes and recovers.
The bank also mentioned the logic of central bank demand support: it believes that if the proportion of the US dollar in global foreign exchange reserves continues to shrink, the euro will gain a larger allocation share in the process of diversifying the foreign exchange reserves of central banks in various countries.
Although the euro is still the world's second-largest reserve currency, its share is far below the peak level of 28% before the global financial crisis.
With the era of negative interest rates coming to an end and the Eurozone economy stabilizing, central banks around the world will likely resume their efforts to increase their holdings of euro-denominated assets.
Summary and Technical Analysis:
In summary, the exchange rate will be dominated by the comparison of economic data between the US and Europe, the policy signals of the Federal Reserve, and the geopolitical situation in the short term; in the medium to long term, attention should be paid to the resilience of the Eurozone's economic recovery, the divergence in monetary policy paths between the US and Europe, and the potential support for the euro from changes in the global reserve currency landscape.
The market may continue to be highly volatile amid a mix of bullish and bearish factors, and the direction will depend on further clarification from key data and policy signals.
Technically, the euro stopped falling and stabilized after reaching the lower edge of the trading range. 1.1600 is a strong support level, and the nearest support is around 1.1644, which is near the lower edge of the trading range.
If the exchange rate holds above 1.1644, the euro/dollar exchange rate will shift from a decline to range-bound trading.
Resistance levels are around 1.1685 and 1.1725.
(EUR/USD daily chart, source: FX678)
At 20:24 Beijing time, the euro was trading at 1.1667/68 against the US dollar.
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