In March 2025, the euro-dollar (EURUSD) exchange rate ushered in a historic moment, soaring by more than 2% in just three days, setting the strongest increase in 10 years. This drastic fluctuation has attracted widespread attention in the market, and behind it is the resonance of multiple factors. This article will analyze the deep logic of the euro's surge from the perspectives of monetary policy, economic fundamentals, geopolitical environment and market sentiment.
Monetary policy divergence: The collision between the ECB's "hawkish" stance and the Fed's expectations of rate cuts
One of the core drivers of the euro's rise this time is the significant divergence in monetary policy between the European and American central banks.
The ECB insists on a tight policy: Although inflation in the eurozone has eased by the end of 2024, the European Central Bank (ECB) still maintains a hawkish stance, emphasizing that "more evidence of inflation control is needed" before considering rate cuts. In particular, the tough statements of officials such as the President of the German Central Bank have strengthened the market's expectations that the ECB will maintain high interest rates or even raise interest rates further, directly boosting the attractiveness of euro assets.
Expectations of Fed rate cuts have increased: In contrast, US economic data showed signs of weakness in early 2025, and the market generally bet that the Fed will start a rate cut cycle in March. According to the CME FedWatch tool, the market's expectations for the Fed's rate cuts this year have expanded to 75 basis points. The expectation of a narrowing interest rate gap between the United States and Europe has put pressure on the US dollar index, indirectly pushing the euro to strengthen.
The resilience of the eurozone economy exceeds expectations: data verifies improved fundamentals
The improvement in economic fundamentals provides a solid foundation for the euro to rise:
GDP and the job market both rebounded: At the beginning of 2025, the eurozone manufacturing PMI returned to the expansion range, service industry demand continued to recover, and the unemployment rate fell to a historic low of 6.8%. In particular, Germany's industrial output data exceeded expectations, easing market concerns about a recession after the energy crisis.
Inflation pressure is controllable: Although energy price fluctuations still exist, the core CPI in the euro area has remained stable at around 2.5% for three consecutive months, indicating that the ECB's policy has effectively curbed the inflation spiral. This sign of a "soft landing" has strengthened investors' confidence in euro area assets.
Geopolitical risk easing and energy crisis easing
The improvement of geopolitical and energy supply patterns further supports the euro:
The impact of the Russian-Ukrainian conflict has faded: As the diversification of Europe's energy structure accelerates, the level of natural gas reserves will reach more than 90% by the beginning of 2025. German Chancellor Scholz has made it clear that "the risk of energy price surges is controllable." The decline in energy costs has reduced corporate production costs and boosted the competitiveness of euro area exports.
Political uncertainty has decreased: France and Germany have made progress in fiscal integration negotiations, easing market concerns about political divisions within the euro area. At the same time, there is no sign of deterioration in the Greek debt problem, and the overall stability of the euro area has increased.
Market sentiment and technical resonance
Short-term market behavior has amplified the euro's rise:
Short covering and capital inflows: Previously, due to the energy crisis and weak growth, euro short positions accumulated. As the good news was released, a large number of short positions were closed, triggering a short squeeze. In addition, global funds shifted from US dollar assets to European stocks and bonds with more attractive valuations, further boosting demand for the euro.
Technical breakthroughs triggered follow-up buying: On March 6, after the euro broke through the key resistance level of 1.0750 against the US dollar, it triggered a buy signal from algorithmic trading and trend investors, forming a short-term explosive rise.
Potential risks and future prospects
Although the euro has a sharp short-term rise, its sustainability still needs to observe the following risks:
Fed policy reversals: If US inflation data rebounds, it may reverse the expectation of interest rate cuts and revive the strength of the US dollar.
The eurozone lacks growth momentum: Germany's industrial recovery still depends on global demand. If trade frictions re-emerge or China's economy slows down, it may drag down eurozone exports.
Energy price fluctuations: Geopolitical conflicts or extreme weather may still impact the energy market, increasing the risk of stagflation in the eurozone.
Conclusion
The surge in the euro in March 2025 is the result of the combined effects of monetary policy differences, economic resilience, geopolitical easing and market sentiment. In the short term, the euro may continue to be strong, but the medium- and long-term trend still depends on the final winner of the "resilience competition" between the European and American economies. Investors need to pay close attention to the further guidance of the Federal Reserve's interest rate meeting in March and the eurozone inflation data.
*Disclaimer: The content of this article is for learning purposes only and does not represent the official position of VSTAR, nor can it be used as investment advice.
