Can the Euro Sustain Its Surge as the Fed Prepares to Cut Rates?

The EUR/USD pair has retreated slightly to 1.1846, down 0.18% as of September 17, 2025, after hitting a 2025 peak near 1.1860. This pullback follows a robust rally driven by a weakening US dollar, with markets pricing in a near-certain 0.25% rate cut from the Federal Reserve today. The question looms: can the euro maintain its upward momentum, or will the Fed’s decision introduce unexpected volatility? Investors and traders must exercise caution, staying fully informed as central bank policies and economic data shape the path ahead.

Dollar Weakness Fuels Euro’s Rise

The US dollar’s recent decline stems from disappointing economic indicators, notably August’s jobs report, which added just 22,000 jobs against expectations of 75,000. This has bolstered expectations for a dovish move by Federal Reserve Chair Jerome Powell, who has signaled openness to easing to support growth. With US inflation near the 2% target, a rate cut could further erode the dollar’s appeal, boosting the euro. However, the Fed’s updated Summary of Economic Projections, due today, may signal a slower pace of future cuts, potentially capping the euro’s gains.

Eurozone Stability Bolsters Confidence

In contrast, the European Central Bank, under President Christine Lagarde, has adopted a steady stance, holding the deposit rate at 2%. Eurozone inflation, stable at 2.1%, aligns with the ECB’s target, reducing pressure for further cuts. Positive economic sentiment, reflected in Germany’s ZEW Economic Sentiment Index rising to 37.3 in September, supports the euro’s resilience. This policy divergence—stability in Europe versus easing in the US—underpins the EUR/USD’s recent 1.13% gain over the past month and 14.37% year-to-date surge.

Risks and Opportunities Ahead

The Fed’s decision will be a pivotal moment. A dovish cut could push EUR/USD toward 1.1900, as seen in past easing cycles like 2019, when the dollar weakened temporarily. Conversely, a hawkish tilt from Powell, emphasizing caution due to persistent US inflation pressures, could strengthen the dollar, pressuring the pair downward. Geopolitical risks, including US tariff policies, add uncertainty, potentially impacting eurozone exports and growth. Investors must remain vigilant, as currency markets are prone to sharp swings following central bank announcements.

The EUR/USD’s recent strength reflects a delicate balance of monetary policies and economic signals. Traders and investors should prioritize staying informed, avoiding impulsive decisions in this volatile environment. As the Fed’s decision unfolds, the euro’s trajectory will hinge on how markets interpret Powell’s next steps. Navigating this moment demands a clear-eyed focus on data and discipline to weather potential surprises.