EUR/USD Steady Near 1.16 Despite Long-Term Risks from EU Budget Debate

EUR/USD Steady Near 1.16 Despite Long-Term Risks from EU Budget Debate

The EUR/USD pair is trading steadily in the low 1.16s following a brief spike on Wednesday, fueled by speculation around Federal Reserve Chair Jerome Powell's potential removal. Despite softer USD swap rates and growing expectations of a dovish successor at the Fed, the euro’s gains have remained contained.

Short-Term Risks Appear Balanced

Markets are showing limited directional bias on EUR/USD in the near term. While lower USD rates and expectations for a more dovish Fed Chair support the euro, no significant momentum has developed. Political noise, such as French political speculation, is currently having minimal impact on the pair.

EU Budget Proposal Could Shape Long-Term Euro Outlook

The European Commission has proposed a €2 trillion increase to the EU budget, aiming for implementation by 2027. However, the plan has already met strong opposition from Germany, setting the stage for prolonged negotiations.

EU Commission President Ursula von der Leyen will work to secure unanimous support, but any delay or fragmentation could weigh on investor sentiment toward the euro. A higher EU budget has the potential to reshape fiscal policy, investment, and ultimately the long-term valuation of the euro.

Eurozone Productivity Remains a Drag

Structural factors, including stagnant eurozone productivity relative to the United States, continue to cap EUR/USD’s medium-term fair value. These fundamentals are expected to limit any sustained appreciation, even if short-term political or monetary dynamics shift temporarily.

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