- EUR/USD manages to surpass the 1.0500 barrier, or five-week highs.
- The US Dollar comes under further downside pressure on US tariffs, China.
- The ECB is widely anticipated to trim its policy rate by 25 basis points.
The Euro (EUR) maintained its optimism against the US Dollar (USD) in the latter part of the week, briefly surpassing the key barrier at 1.0500 the figure to reach five-week highs on Friday.
On the other side of the equation, the Dollar’s offered stance only accelerated, sending the US Dollar Index (DXY) to as low as the 107.30 zone, a region also coincident with the provisional 55-day SMA.
The pair’s weekly recovery has aligned with a similarly strong rebound in German bund yields and US yields, particularly in the belly and the long end of the curve.
Furthermore, the Greenback’s lacklustre performance occurred alongside improving sentiment in risk-sensitive assets, as well as ongoing speculation and a lack of clarity surrounding President Donald Trump’s potential trade tariff proposals.
Central banks remain in focus
As we enter the upcoming week, monetary policy is expected to continue to play a pivotal role in steering market sentiment.
In the US, a strong December jobs report initially bolstered confidence in the Federal Reserve’s (Fed) ability to manage the economy. However, with inflation still hovering above the bank’s 2% target, expectations have shifted. Markets now anticipate the Fed could lower rates by only 25 to 50 basis points in 2025.
Anticipating the January 28-29 FOMC gathering, market consensus has almost fully priced out a rate reduction.
Still around the Fed, Chair Jerome Powell has emphasised the challenge of balancing inflation control with economic growth. While acknowledging signs of a cooling labour market, Powell underscored the importance of keeping inflation expectations anchored.
Across the ocean, the European Central Bank (ECB) is on a different trajectory. The ECB is broadly expected to cut rates next week as policymakers, including President Christine Lagarde, stressed the importance of a cautious, step-by-step approach. The ECB is balancing its commitment to reducing rates against the risks of undershooting inflation targets or destabilising the Euro (EUR).
Trade tensions add to uncertainty
Adding another layer of complexity, President Trump’s proposed trade tariffs remain a wild card. If enacted, these tariffs could drive US inflation higher, potentially forcing the Fed to maintain a hawkish stance. This would likely strengthen the Dollar further, putting additional pressure on the single currency (and its risky peers) and possibly reviving concerns about a return to parity for EUR/USD.
EUR/USD: Where do we stand?
It seems the spot has managed to put further distance from recent cycle lows near 1.0180. Against that backdrop, key support levels include 1.0176 (the year-to-date low from January 13), ahead of the psychological 1.0000 mark. On the upside, resistance can be found at the 2025 high of 1.0514 (set on January 24), prior to the December 2024 top of 1.0629.
The broader bearish outlook should persist as long as EUR/USD trades below the 200-day SMA at 1.0771.
Momentum indicators offer a mixed picture. The RSI is improving past the 60 level, underpinning the recovery potential, but the ADX has dipped to around 27, suggesting weakening trend strength.
EUR/USD daily chart
Challenges ahead
The Euro faces significant headwinds in the weeks ahead. A resilient US Dollar, diverging monetary policies, and ongoing economic struggles in the eurozone present a tough environment. German growth concerns and political uncertainties within the bloc only add to the pressure.
While the Euro could see short-term bounces, sustained gains are unlikely unless there’s a meaningful shift in the current economic or monetary policy landscape.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.