EUR/USD breaks through 1.16 level, geopolitical tensions ease triggers chain reaction

Triple Drivers Behind the Record High in Exchange Rates

This week, EUR/USD performed remarkably well, reaching a high of 1.1596 midweek, just one step away from the 1.1600 psychological level, marking the highest point in nearly a week. This rally is not an isolated phenomenon but the result of multiple factors resonating together. First, market expectations of a Fed rate cut in December have intensified, directly pushing the US dollar index below 100 to 99.65, the third time since August that it has fallen to this key level.

The US dollar’s position within the dollar index basket is unshakable, but the euro accounts for the largest share, nearly 60%, meaning any depreciation of the dollar directly benefits the euro. In other words, the downward pressure on the dollar index is effectively providing strong support for the euro.

Divergence in Central Bank Policies Becomes a Key Variable

The policy paths of the two major central banks—Europe and the US—are clearly diverging, which is the core engine driving exchange rate movements. The market generally believes that the European Central Bank’s rate-cut cycle is nearing its end. The ECB will hold a meeting on December 18, during which new economic forecasts will be released. Market focus will be on whether inflation data continues to approach the target, potentially serving as a catalyst to restart discussions on rate cuts.

In contrast, the Fed’s policy stance is under close scrutiny. The 10-year US Treasury yield has fallen back to around 4%, and traders widely expect the Fed to implement significant rate cuts next year. Market news indicates that Trump is very likely to announce a new Fed chair candidate before Christmas, with current White House National Economic Council Director Harsh J. Hasset being the top contender. If Hasset takes the helm, expectations of substantial rate cuts next year will be broadly recognized as highly probable.

Geopolitical Risks Easing Provide Economic Benefits

More importantly, developments in geopolitical tensions are providing fundamental support for the euro. Expectations that the Russia-Ukraine conflict is nearing its end are spreading in the market. In recent Geneva talks, US and Ukrainian representatives have streamlined their proposals from 28 points to 19, indicating significant progress. Ukrainian President Zelensky plans to meet with Trump this Thursday, and the countdown to a peace agreement seems underway.

The resolution of the conflict will send important economic signals. Once stability is restored, Russia’s oil exports will re-enter the international market, exerting downward pressure on global oil prices and improving inflation and economic growth prospects in Europe. As one of the largest economies in the eurozone, France will also benefit from falling energy prices and easing geopolitical risks, which bodes well for the euro overall. The market widely expects that once the conflict ends, EUR/USD could break through the 1.2 level.

Technical Confirmation of an Uptrend

From a daily chart perspective, EUR/USD has remained above 1.1500 consistently over the past month, and the MACD indicator has formed a golden cross, indicating that the correction cycle since mid-September may be coming to an end. If subsequent prices can effectively break through and stabilize above 1.1630, the market is expected to further rebound to test resistance at 1.1800 and even the 1.2 level. The current technical pattern aligns with fundamental expectations, providing a dual confirmation for further upside.