"The interest rate differential between the Fed and the ECB is narrowing. The Fed has brought its target rate down to 3.50% - 3.75%, and recent Fed communications continue to stress that policy remains "restrictive" but still leaves room for further cuts, particularly as the labour market shows signs of softening and employment risks are being mentioned more frequently. Meanwhile, the ECB is holding the deposit facility rate at 2.00%, alongside the MRO at 2.15% and the marginal lending facility at 2.40%."
"Eurozone inflation in November 2025 was recorded by Eurostat at around 2.1%, very close to the ECB's 2% target. By contrast, US inflation remains around 3%, meaning the USD no longer retains the same advantage it once had. Inflation being close to target limits the ECB's ability to turn more hawkish; however, it also helps support confidence in the euro and contributes to overall currency stability."
EURUSD recently pulled back from near 1.1800 after a significant euro recovery versus the US dollar. The USD is gradually losing its advantage as markets price an approaching US easing cycle and lower US interest rates next year. The interest rate differential between the Fed and the ECB is narrowing: the Fed's target rate is 3.50–3.75% while the ECB's deposit facility, MRO and marginal lending rates are 2.00%, 2.15% and 2.40% respectively. Eurozone inflation around 2.1% sits close to the ECB's 2% target, while US inflation near 3% keeps the Fed cautious. Future expectations about the pace of Fed cuts relative to the ECB will drive EURUSD direction.
Read at London Business News | Londonlovesbusiness.com
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