The euro breached the $1.17 mark on Thursday, reaching levels last seen in September 2021. This 13% year-to-date surge positions the common currency on course for its strongest annual performance since 2017 — and potentially even since 2003. The rally therefore brings the euro closer to the psychologically significant 1.20 threshold.
Since Donald Trump’s inauguration on 20 January 2025, the euro has appreciated roughly 15% against the dollar. But what are the reasons behind the euro’s recent success, and how much further can it rise?
Fiscal turn in Germany is a game changer
The explanation lies in an unusual convergence of fiscal stimulus in Europe, waning confidence in US monetary policy, and a build-up of speculative dollar short positions that are fuelling the euro’s ascent.
While the European Central Bank (ECB) has extended its rate-cutting cycle, the key shift underpinning the euro’s strength has come from fiscal policy — particularly in Germany.
In March, the Bundestag approved a constitutional amendment exempting military and infrastructure spending from the country’s strict “debt brake” law.
This legal reform paved the way for a €500 billion infrastructure fund, earmarked for green energy, digital transformation, and regional development through 2035 — all structured off-budget to bypass debt constraints.
Simultaneously, Berlin has pledged to increase defence spending to 3.5% of GDP, aligning with NATO’s Readiness 2030 goals and the broader €800 billion ReArm Europe initiative.
US turmoil weighs on dollar sentiment
Across the Atlantic, the US economy has shown signs of softening. First-quarter GDP contracted, driven partly by a front-loading of imports ahead of new tariffs which were set to take effect in April.
However, market attention has focused more sharply on the political pressure mounting against Federal Reserve Chair Jerome Powell.
Despite Powell reiterating this week that rate cuts are premature — citing solid growth and tariff-driven inflation uncertainties — investor confidence in Fed independence has been shaken.
According to BBVA analysts: “Jerome Powell is not leaning toward a rate cut as soon as July, although there is an internal debate at the Fed about the timing of the next rate cut, and it may well continue to grow.”
They added that the dollar’s weakness has deepened “amid reports that US President Donald Trump is considering selecting and announcing a replacement for Fed Chair Jerome Powell by September or October”. This is despite the fact that Powell’s term is set to end in May 2026.
Markets interpret this as a potential “shadow chairman” scenario, where someone behind the scenes could keep interest rates low, thereby putting negative pressure on the dollar.
Euro-dollar outlook: What analysts are watching
Francesco Pesole, analyst at ING, underscored the growing relevance of upcoming US employment data.
“News on the jobs market has significant impact potential now that inflation figures for May have failed to trigger a dovish response by Powell. The rationale could be that if something moves on the second part of the mandate (full employment), a few more FOMC members could join the dovish ranks despite inflation concerns.”
He noted that markets currently price a one-in-four chance of a rate cut on 30 July and 62 basis points of easing by the end of the year.
Meanwhile, investor positioning continues to steer euro-dollar movements.
Matthew Ryan, Head of Market Strategy at Ebury, said: “EUR/USD is almost entirely driven by rising dollar shorts, rather than a more positive outlook for the common bloc’s economy.” In other words, the euro is rising against the dollar because investors are betting against the greenback, rather than placing more faith in the euro.
Technical indicators also point to continued momentum. Luca Cigognini, analyst at Intesa Sanpaolo, commented: “The short-term structure of EUR/USD remains generally bullish. A break above 1.1717, now a resistance level, could push the euro toward 1.1750, raising the next target to 1.1800/1.1820.”
Beyond those levels, traders are eyeing resistance at 1.1910 — the highs of August 2021 — followed by the psychological barrier at 1.20.
Higher targets include 1.2350 (January 2021) and 1.2550 (February 2018), but much will depend on how economic indicators and political developments evolve in the second half of the year.
