2026-01-27 20:35:00
Wednesday is the Federal Reserve decision and the US dollar is quickly becoming a topic of conversation.
The FOMC is highly unlikely to cut rates or signal another imminent move but even the hint of a dovish inflation forecast is likely to weigh on the US dollar. That will be enough to push the euro above 1.20 to the highest levels since 2021.
It’s been a rough decade for the euro so far but last year saw surprisingly strong growth as European policymakers began to embrace a more-pragmatic approach. That’s included higher spending in notoriously-tight Germany as they try to fight back against a manufacturing slowdown.
In addition, trading partners are seeing Europe as far more predictable that the US and that could be dictating investment flows.
EUR/USD weekly
The latest leg higher in the euro is more about USD weakness than euro strength. The dollar is down sharply against the yen on intervention fears but it’s worth noting that EUR/JPY is also near record highs.
Today, the US dollar is sharply lower against the Australian dollar, Canadian dollar, pound and Swiss franc. In that context, the euro is a mid-performer.
What’s also notable is that European equities outperformed the US last year. For years, the US stock market (and the Nasdaq in particular) was the only game in town but valuations have now far outpaced earnings growth. Some investors are fearful of an AI valuation wipeout or a funding crunch. In contrast, European investments are boring but cheap. If there is a fresh move to pragmatism and deregulation in Europe, the re-rating could continue.
Technically, beyond the 1.20 barrier, the early 2021 high was 1.2225 followed by the 2018 high of 1.2475. Those are reachable levels, particularly if we get some help from the Fed and Trump’s new Fed chair (whoever it is) quickly declares that he wants rate cuts.
