EUR/USD Forecast: Compelling Dollar Weakness Bolsters Euro Rally According to Nordea Analysis

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EUR/USD Forecast: Compelling Dollar Weakness Bolsters Euro Rally According to Nordea Analysis

Global currency markets witnessed significant movements this week as the EUR/USD pair climbed to three-month highs, with Nordea analysts identifying persistent dollar weakness as the primary catalyst supporting the euro’s remarkable resilience in 2025’s volatile financial landscape.

EUR/USD Technical Analysis and Current Market Position

Currency traders observed the EUR/USD pair reaching 1.0950 during Thursday’s London session, marking a 2.3% appreciation since the Federal Reserve’s latest policy announcement. This movement represents the most substantial weekly gain for the currency pair since January 2025. Market data reveals several critical technical developments that support Nordea’s assessment of dollar weakness.

Firstly, the dollar index (DXY) declined to 103.8, approaching its lowest level since early February. Meanwhile, the euro demonstrated strength against multiple major currencies, not just the dollar. Technical indicators show the EUR/USD breaking above its 50-day and 100-day moving averages, suggesting sustained momentum rather than temporary fluctuation.

Several key resistance levels have been breached in recent sessions:

• 1.0880 resistance – Broken on Tuesday with high volume
• 1.0925 Fibonacci level – Surpassed during Wednesday’s European session
• 1.0950 psychological barrier – Tested multiple times Thursday

Market analysts note that trading volumes for EUR/USD options increased approximately 40% above the monthly average, indicating institutional participation in the current trend. The relative strength index (RSI) currently reads 62, suggesting the pair has room for further appreciation before reaching overbought territory.

Fundamental Drivers Behind Dollar Weakness

The U.S. dollar’s recent depreciation stems from multiple interconnected economic factors that Nordea economists have meticulously tracked throughout 2025. Federal Reserve policy adjustments represent the most significant driver, with the central bank implementing a more dovish stance than markets anticipated.

During their March meeting, Fed officials revised their interest rate projections downward, now forecasting only two rate cuts in 2025 rather than the previously expected three. More importantly, Chair Jerome Powell emphasized data dependency, specifically noting that employment figures and inflation metrics would guide future decisions rather than predetermined timelines.

Recent economic data has reinforced this cautious approach:

Concurrently, U.S. Treasury yields have declined across the curve, with the 10-year yield falling to 4.05% from 4.25% just two weeks prior. This reduction in yield advantage diminishes the dollar’s attractiveness to international investors seeking higher returns. Foreign central banks have also adjusted their reserve allocations, with several Asian and Middle Eastern institutions reportedly reducing dollar holdings in favor of diversified portfolios.

European Economic Resilience Supporting Euro

While dollar weakness provides the primary thrust for EUR/USD appreciation, the euro benefits from its own fundamental strengths. The European Central Bank has maintained a relatively hawkish stance compared to global counterparts, with President Christine Lagarde repeatedly emphasizing the need to ensure inflation returns sustainably to the 2% target.

Eurozone economic data has surprised positively in several key areas. The composite PMI reading reached 51.2 in March, indicating expansion in private sector activity. German industrial production increased 0.8% month-over-month, exceeding expectations of 0.3% growth. Furthermore, European inflation metrics show more persistent services inflation than anticipated, giving the ECB justification to maintain higher rates for longer.

Political developments have also contributed to euro stability. The European Union’s agreement on a new fiscal framework provides greater clarity on member state budget rules, reducing uncertainty for investors. Additionally, progress on the Capital Markets Union initiative promises to deepen European financial integration, potentially increasing demand for euro-denominated assets.

Comparative Central Bank Policies and Currency Implications

The widening policy divergence between the Federal Reserve and European Central Bank creates favorable conditions for euro appreciation against the dollar. Nordea’s analysis highlights that while both central banks face similar inflation challenges, their response timelines and communication strategies differ significantly.

The Federal Reserve has prioritized economic growth and employment stability, accepting slightly higher inflation for longer. Conversely, the European Central Bank maintains greater concern about inflation expectations becoming unanchored, particularly given Europe’s historical sensitivity to price stability. This philosophical difference manifests in their respective policy paths.

Interest rate differentials between the eurozone and United States have narrowed from 125 basis points in December 2024 to approximately 85 basis points currently. Forward markets price additional convergence throughout 2025, with the gap potentially closing to 50 basis points by year-end. This narrowing reduces the dollar’s yield advantage, historically a significant support factor.

Currency analysts note that real yield differentials—adjusted for inflation—now favor the euro for the first time since 2021. This shift reflects both declining U.S. nominal yields and higher European inflation expectations. Real yield calculations significantly influence institutional allocation decisions, particularly for pension funds and insurance companies with long-term currency exposures.

Global Capital Flows and Reserve Currency Dynamics

Broader trends in global capital allocation further support Nordea’s assessment of structural dollar weakness. International organizations have gradually increased euro holdings within their reserve portfolios throughout 2024 and early 2025. The International Monetary Fund’s COFER data shows the euro’s share of global reserves increased to 20.5% in Q4 2024, up from 19.7% a year earlier.

Several factors drive this gradual reserve diversification:

• Geopolitical considerations – Some nations seek reduced dollar dependency
• Yield opportunities – European bonds offer attractive real returns
• Liquidity improvements – Euro-denominated markets have deepened
• Hedging needs – Corporations seek natural currency matches

Additionally, European equity markets have outperformed U.S. counterparts in local currency terms year-to-date, attracting foreign investment that requires euro purchases. The Euro Stoxx 50 has returned 8.3% compared to the S&P 500’s 6.7% gain when measured in their respective currencies. This relative performance encourages capital flows into European assets, supporting euro demand.

Market Sentiment and Positioning Analysis

Trader positioning data reveals significant shifts in market sentiment toward the EUR/USD pair. According to the Commodity Futures Trading Commission’s weekly Commitments of Traders report, leveraged funds reduced net short euro positions by 42,000 contracts over the past three weeks. This represents the most rapid covering of euro shorts since September 2023.

Options market activity provides additional insight into trader expectations. The one-month risk reversal for EUR/USD—measuring the premium for calls over puts—turned positive for the first time in six months. This indicates traders now pay more for protection against euro strength than weakness, reflecting changed sentiment.

Several technical patterns support continued euro appreciation:

• Bullish flag formation – Developing on daily charts
• Golden cross – 50-day moving average crossing above 200-day average
• Higher lows pattern – Established since January bottom
• Breakout volume confirmation – Above-average volume on key moves

Market participants now watch several key levels. Immediate resistance sits at 1.0980, followed by the psychologically significant 1.1000 level. Support has formed around 1.0880, with stronger support at 1.0820. A sustained break above 1.1000 could trigger algorithmic buying programs and prompt further position covering.

Conclusion

The EUR/USD pair’s recent appreciation reflects fundamental shifts in global currency dynamics, with Nordea’s analysis correctly identifying dollar weakness as the primary driver. Multiple factors converge to support this trend, including Federal Reserve policy adjustments, resilient European economic data, narrowing yield differentials, and changing global capital allocations. While currency markets remain sensitive to incoming economic data and central bank communications, current conditions favor continued euro strength against the dollar throughout 2025. Market participants should monitor upcoming inflation releases from both regions and central bank commentary for signals about the sustainability of this EUR/USD trend.

FAQs

Q1: What specific factors does Nordea identify as causing dollar weakness?
Nordea analysts point to Federal Reserve policy adjustments, disappointing U.S. economic data, declining Treasury yields, and changing global reserve allocations as primary factors driving dollar weakness in 2025.

Q2: How does European Central Bank policy differ from Federal Reserve policy currently?
The ECB maintains a more hawkish stance focused on ensuring inflation returns sustainably to target, while the Fed has adopted a more dovish approach prioritizing economic growth and employment stability despite slightly higher inflation.

Q3: What technical levels are important for the EUR/USD pair currently?
Key resistance levels include 1.0980 and the psychological 1.1000 barrier, while support has formed around 1.0880 with stronger support at 1.0820. The pair recently broke above its 50-day and 100-day moving averages.

Q4: How have global capital flows affected the EUR/USD exchange rate?
International institutions have gradually increased euro holdings in reserve portfolios, while European equity market outperformance has attracted foreign investment requiring euro purchases, both supporting euro demand.

Q5: What economic indicators should traders watch for EUR/USD direction?
Traders should monitor U.S. and Eurozone inflation data, employment figures, central bank meeting minutes, and purchasing manager indices (PMIs) for signals about economic health and policy directions.

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