Long EUR/USD: Euro Poised For Gains As U.S. Dollar Weakens

The EUR/USD currency pair is presenting a high-probability long opportunity, underpinned by divergent economic trajectories, improving investor sentiment towards the eurozone, and a technically confirmed bullish breakout. With the US dollar showing signs of macroeconomic fatigue and the euro benefitting from improving trade and fiscal dynamics, the case for EUR/USD upside remains compelling.

Fundamental Analysis

The euro is gaining strength across several fundamental dimensions, especially when compared to the softening outlook for the US dollar:

• GDP Growth: The eurozone economy expanded by 0.6%, a sharp improvement from 0.3% previously. In contrast, the US contracted by -0.2%, marking a reversal from earlier robust performance.
• Current Account: The eurozone recorded a healthy surplus of €60.1 billion, an increase from €38.6 billion, signalling strong external demand. The US, by contrast, registered a -€304 billion deficit.
• Debt & Budget Discipline: Eurozone government debt stands at 87.4% of GDP, compared to 124% for the US. Additionally, the eurozone’s fiscal deficit is only -3.1%, while the US budget deficit has widened to -6.2%.
• Inflation Dynamics: Eurozone inflation cooled to 1.9% YoY, giving the European Central Bank room to hold rates steady without aggressive cuts. Meanwhile, the US is facing disinflation at 2.4% YoY, increasing pressure on the Federal Reserve to pivot dovish.
• Interest Rate Differential: The ECB’s benchmark rate sits at 2.15%, lower than the Fed’s 4.5%, but with rate cut expectations building for the US, this gap is expected to narrow, diminishing support for the USD.

Overall, the eurozone’s improving trade surplus, stronger fiscal foundations, and growing resilience position it well relative to the weakening fundamentals of the US economy.

Sentiment Analysis

Sentiment dynamics are aligning in favour of further EUR/USD upside:

• Retail Positioning: Approximately 68% of traders are short EUR/USD, creating a strong contrarian bullish signal that historically supports trend continuation.
• Institutional Behaviour: Large funds are gradually increasing euro exposure as the US dollar faces growing risks related to twin deficits and slowing growth.
• Macro Risk Positioning: Amid global rebalancing, investors are shifting capital towards regions with improving external balances and undervalued currencies—benefiting the euro.

This sentiment alignment, combined with a shift in global capital flows, adds fuel to the bullish case for EUR/USD.

Technical Analysis

The EUR/USD daily chart confirms the bullish bias across all major indicators:

• Ichimoku Cloud:
  • Price is well above the Kumo, confirming a bullish breakout.
  • Conversion Line (Tenkan-sen = 1.14941) > Base Line (Kijun-sen = 1.13484) – bullish momentum is active.
  • Future Kumo is thick and rising, with Leading Span A (1.14213) well above Span B (1.12183).
  • Chikou Span is clearly above price and cloud – trend confirmation signal.
• RSI: Currently at 62.98, indicating strong momentum with room to run before reaching overbought levels.
• MACD: Bullish crossover above zero, with a rising histogram – confirming strength behind the trend.
• Volume: Increased during the breakout, supporting the validity of the move.
• Price Action:
  • Recent highs around 1.1580 have been tested.
  • Clean breakout above previous resistance zones at 1.1450–1.1500 opens the door to targets at 1.1650, then 1.1800.

Conclusion

Long EUR/USD is a high-conviction trade that is well-supported across fundamentals, sentiment, and technicals. The eurozone’s stronger current account, improving growth, and solid fiscal health contrast sharply with the US’s deteriorating economic data and ballooning deficits. Traders are heavily short the pair, creating the potential for a squeeze higher, while the technical structure points to continuation of the breakout.

As the Fed edges closer to easing and the ECB holds its ground, EUR/USD looks set to benefit from both monetary and macroeconomic tailwinds.

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