Will the euro start to recover against the US dollar?

The Eurodollar exchange rate has fallen in recent weeks to its lowest level since late July, despite interest rate cuts in the United States, the end of quantitative easing (QT) at the Fed, and the approach of 2026, which will likely bring another round of rate cuts in the United States under the leadership of the new Fed chairman, designated by Donald Trump. This decline also occurred despite the exponential growth of the US budget deficit and political infighting, as well as the nearly 40-day government shutdown in the United States, the end of which is still not in sight and which is costing the economy billions of dollars.

PMI data: economy rebounds

While a change in monetary policy in the US seems almost certain, paradoxically European Central Bank may not find significant arguments for another 'series of rate cuts' on the Old Continent next year. Today's final Eurozone and German PMI readings indicated a significant economic rebound in October, with both services data and the combined PMI exceeding forecasts and hovering around 53 levels.The US economy is starting to underperform compared to Europe, and while it's unclear whether this dynamic will last, the Eurodollar could still find fundamental factors supporting a return to the 1.16 area. Importantly, the pair has also reached a significant technical point, halting declines at the 200-session exponential moving average, around 1.14.

So, are there long-term foundations for a complete reversal of sentiment in the Eurodollar and a sustained return of the dollar index above 100? Given the current macroeconomic landscape, they appear quite fragile. A number of indicators from the Old Continent have recently shown a systematic (even if slight) improvement, leading to confirmation of the narrative of a more lasting, albeit variable, recovery of the European economy.Meanwhile, in the United States, the situation is looking increasingly dire for most consumers, and the economic system resembles a K-shaped economy, where wealth imbalances are diverging at an unprecedented rate; the middle and upper classes are doing increasingly well, while other social groups struggle to increase consumption or maintain their standard of living.

Will there be a permanent trend reversal?

Besides hundreds of tech giants tapping into the trend largely based on artificial intelligence, American companies in the "old economy" are starting to underperform, and dozens of giant American companies, which serve as indicators of consumer health, are performing very poorly this year. These include shares of companies like Colgate-Palmolive, PepsiCo, Starbucks, Cimberly-Clark, Deckers, and Lululemon Athletica. Interestingly, the market is also slowly starting to bet against the businesses of companies exposed to the risk of competing with artificial intelligence, including the analytical firms Gartner and FactSet Research Systems; both companies are losing over 40% this year.

Turning to macro dynamics, the dollar's recent rebound may be a short-term correction in a broader downtrend rather than a sign of a sustained reversal back towards the greenback. Even the absence of a December rate cut by the Fed does not justify a permanent trend reversal as long as next year has a high chance of bringing at least 100 basis points of policy easing on the other side of the Atlantic..

On Wednesday at around 10:45 a.m. in Poland, the euro is 4,25, the US dollar is 3,70, the pound sterling is 4,83 and the Swiss franc is 4,57.

Source: Eryk Szmyd, XTB