There's an interesting dynamic playing out in the EUR/USD pair right now, and Commerzbank's currency strategist Thu Lan Nguyen has framed it in a way that I think cuts through a lot of the noise currently surrounding the forex market.
The short version: Euro upside is capped in the near term, but the longer-term risks are increasingly tilted against the Dollar. Let me unpack why that distinction matters — because conflating the two timeframes is where a lot of traders get into trouble.
First, let's acknowledge what's actually happening.
EUR/USD is trading above 1.1750, having recovered from a bearish opening gap earlier in the week. That recovery, modest as it is, tells you something important. The Euro isn't collapsing. Neither is the Pound. Both currencies have held up considerably better than they did during the 2022 energy shock — the last time markets had to price in a sudden, geopolitically-driven inflation surge of this magnitude.
Why the relative resilience this time? The market's answer is fairly clear: investors trust that both the ECB and the Bank of England have learned from the policy mistakes of four years ago. In 2022, both central banks were slow to respond to inflation. The market was burned by that hesitation. This time around, expectations for quicker tightening are already being priced in — and that expectation is providing a floor under the Euro and the Pound against the Dollar.
That's the positive read. Here's where Commerzbank adds important nuance.
The ECB pricing may already be too aggressive.
This is the part of the analysis that deserves careful attention. Nguyen notes that Commerzbank has "expressed doubts about market expectations for the ECB on several occasions." In plain terms — the market may be overestimating how quickly and how forcefully the ECB will tighten policy in response to the current inflation shock.
If that's correct, the near-term upside for EUR/USD is genuinely limited. The Euro's relative strength right now is partly built on an assumption about ECB behaviour that may not fully materialise. When that reality check arrives — and it usually does — the Euro's ceiling could prove lower than current positioning suggests.
This isn't a bear case for the Euro. It's a reality check on how much of the good news is already in the price.
Now here's the longer-term picture — and this is where it gets genuinely interesting.
The structural risks for the US Dollar are building, and they are building across multiple dimensions simultaneously.
Start with inflation. Import tariffs have already pushed US inflation higher in recent months. The structural inflationary pressure from trade policy is not a temporary shock — it is a persistent headwind that keeps price pressures elevated even as the broader economy faces potential slowdown. That combination — higher inflation alongside weaker growth — is one of the most difficult environments for any central bank to navigate.
Then add the political dimension. Commerzbank specifically flags the risk of "further attacks by the US government" making it difficult for the Federal Reserve to respond adequately to an inflation shock. The Fed's independence — long taken for granted as a bedrock of Dollar credibility — is under a level of political pressure that markets are still in the early stages of pricing properly. A central bank that cannot act freely in response to economic conditions is a fundamentally less credible institution. And less credible institutions produce less credible currencies over time.
The analytical framework Nguyen offers is a useful one: over the longer term, "the wheat will be separated from the chaff." Currencies that can bring inflation back toward the 2% target more quickly will prove robust. Currencies whose central banks face political interference in that process — or whose governments are structurally adding to inflationary pressure through trade policy — will struggle.
By that measure, the Dollar's longer-term position looks considerably more vulnerable than the current safe-haven premium it is commanding would suggest.
What does this mean practically for anyone watching EUR/USD?
In the near term — be cautious about chasing Euro strength. The pair has recovered, but the ceiling may be lower than it looks if ECB expectations need to be walked back. The Middle East uncertainty is also keeping Dollar safe-haven demand alive, which further caps the upside.
In the medium to longer term — the Dollar's structural vulnerabilities are real and growing. Inflation persistence, tariff-driven price pressures, political interference with monetary policy independence, and the erosion of institutional credibility are not short-term noise. They are slow-moving but powerful forces that eventually find their way into exchange rates.
The current EUR/USD level above 1.1750 might feel like strength for the Euro. In the longer-term context, it may turn out to be just the beginning of a larger Dollar repricing that markets haven't fully confronted yet.
Watch the Fed. Watch the political pressure on monetary policy. And watch whether the ECB actually delivers what the market is currently pricing.
Those three things will tell you more about EUR/USD's direction over the next 12 months than any single data print.
Not financial advice. Always conduct your own research before making trading decisions.
What's your view on EUR/USD from here? Are you positioning for Dollar weakness or waiting for more confirmation? Drop your thoughts below. 👇
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